Government takes a hard look at softening economy

Richard Forgan – Government takes a hard look-Richard Forgan Web

Faced with increasing calls for loosening the purse strings, together with subdued growth and low inflation, Finance Minister Bill English has stuck to his ‘steady as she goes’ strategy of the last five years following the Half-Yearly Economic and Fiscal Update and the Budget Policy Statement released on December 15, 2015.

There is an increase to capital expenditure over the next two years, but otherwise no real change to the basic stance. Expenditure will continue to be tightly controlled, with some extra financial capacity to play with pre-election.

Deficit forecast

Government takes a hard look- Winners & Losers WebHaving achieved the long-targeted surplus in 2014-2015, the Treasury is now forecasting a return to a small deficit in 2015-2016, followed by a return to growing surpluses over the following two years.

This must be a mild disappointment, but in the grand scheme of things will not matter greatly (the language is now ‘broadly in balance’ rather than ‘back in the black’). This is certainly not a turn-around in the Government’s finances that demands quick action to reduce expenditure.

Some stimulus

Overall, government expenditure provides some stimulus to growth over the next year, as requested by the Governor of the Reserve Bank of New Zealand.

This stimulus is principally in new capital expenditure, and given the lead times required for this, this looks more like a happy coincidence than a response to the Governor.

Net migration continues to be high, flowing through into greater capacity in the labour market generally, and contributing to a higher unemployment rate over the last six months. Yet, about 195,000 net new jobs are expected to be created over the next four years, with unemployment dropping significantly.

Net debt is staying higher for longer, both in cash terms and as a percentage of GDP, but again the Government continues to target a reduction to 20% of GDP, and thereafter has signalled that it will aim to maintain this ratio between 0% and the current 20% target.

Key priorities

While there has been an increase in the capital allowance, we expect demands for capital expenditure, both within the Government and for economic infrastructure continue to be very strong in the longer term.

The Government’s key priorities remain the same as in previous years: (a) responsibly managing the Government’s finances (b) building a more productive and competitive economy (c) delivering better public services within tight fiscal constraints, and (d) rebuilding Christchurch.

Budgets over the last two years have kept tightly to the Government’s fiscal commitments, but have combined this fiscal rectitude with a strong theme of targeting society’s most vulnerable.

The Budget Policy Statement signals a similar approach, with a particular focus on social investment – early and more effective intervention to assist the vulnerable to become less so.

Government takes a hard look- Net Crown Debt Web

Capital Investment

Allocations for capital investment have also been increased, rising to a little over $6 billion, but are then forecast to reduce significantly towards the end of the decade. While this puts more pressure on the debt track, adding productive high quality infrastructure can only be good for the economy in the long run.

Richard Forgan is a Partner at PricewaterhouseCoopers based in Wellington.

Email: richard.c.forgan@nz.pwc.com

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