Tightened belt may loosen budget surplus

Craig Ebert

Given the alternative, it is not a bad thing that people still seem obsessed with the government achieving a surplus in the very near term, especially with the fiscal slippage affirmed in Budget 2015, announced on May 21, 2015.

We need to keep an eye on this. However, with its centrepiece policy aimed at alleviating the plight of children in poor families, we must also realise that this Budget’s overall numbers, and underlying stories, surely do not speak of economic and financial hardship, in general.

If we are to have a go at the Budget’s fiscal projections then it is not because they have failed to burst back into the black as soon, or as much, as previously imagined.

A phase of low inflation (and low interest rates) can do that to the books.

Slower growth

It is more because the projections are based on a macroeconomic outlook that seems a bit optimistic. It is not that Treasury’s forecasts are raging beyond credibility.

It is possible that GDP growth slows only glacially over the coming few years, to average about 3% per annum.

However, we think that the economy may slow to about 2% annual pace by 2016-2017.

Diving immigration

Treasury expects this to keep barrelling along at a brisk rate of knots, even though net immigration may take a dive soon. We broadly share Treasury’s view on waning immigration, but see this as one of the factors causing consumption growth to moderate over the coming years.

In this vein, we also have to wonder the likelihood of house price inflation pressing on as firmly as Treasury expects over the coming few years (so much for affordable housing?). While it did talk about risks on this front, the upside scenario was centred on maintained-high immigration, while the downside scenario was more pitched around global demand and commodity prices.

Watching expenditure

The broader fiscal issue for the macro-economy is that the government may have to maintain a tight rein on overall expenditure over the next couple of years to keep the surplus target in the frame.

We should not overlook the Crown accounts underfoot, however.

We say this with reference to the fact that the monthly accounts to March 2015 proved a lot better than expected.

This was partly because tax revenue was (suddenly) running 1.8% above (Half Year Economic Fiscal Update 2014) plan.

Outright, core tax in the March quarter was up almost 9% on a year ago. It will be interesting to see how the June quarter accounts travel.

Good buffer

Could we yet see a tiny operating surplus for 2014-2015?

Let us not overlook the fact that a $2.5b provision has been maintained in the fiscal projections for each of the 2017-2018 and 2018-2019 June years.

It is a nice buffer to have.

It will either afford some moderate tax cuts starting 2017 (a scheduled election year) or go a good way to helping secure a surplus around that time.

The government has taken no decisions on tax cuts at this stage, however. It will still depend on economic circumstances closer to the time.

Still, the current fiscal projections entail a bit more of cash shortfall.

Bond Programme

Therefore, the bond programme must be increased but only by $1 billion to $8 billion for 2015-2016, meaning that it remains unaltered (from half-yearly forecast) at $7 billion a year beyond this period.

The Debt Management Office is yet to announce how this will play out in full.

We look toward to its quarterly update in June.

However, it has stated that “subject to market conditions, a new April 14, 2033 Nominal Bond is expected to be launched, via syndication, in the first half of 2015-2016.”

Inflation-indexed bond issuance will be up to $2 billion of the $8 billion 2015-2016 Domestic Bond Programme.

Crown Debt

Even so, net Crown debt is expected to top out at 26.3% of GDP in 2015-2016, still very low by international standards.

It is one of many things likely to keep the rating agencies relatively comfortable with the New Zealand story. Already, Standard and Poor’s and Moody’s have come out in support of Budget 2015 in terms of ratings and outlooks.

The markets have also taken the Budget in their stride. There has been very little reaction, if any, in the currency and wholesale interest rate markets.

For Web Edition-Budget Special- Tightened belt may loosen- BNZ LogoAs important as Budgets still are for the wider economy, the markets are obviously waiting to see the Reserve Bank’s Monetary Policy Statement in June.

Craig Ebert is Senior Economist at BNZ based in Wellington. BNZ is the Title Sponsor of the Indian Newslink Indian Business Awards 2015, the fifth successive year.

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