Government books – on track but tight

The Half Year Economic and Fiscal Update (HYEFU) and its more political companion, the Budget Policy Statement (BPS), have the new government on track to hit all of its targets – but with very little wriggle room.

The new spending allowance over the next four budgets is just $6.6 billion once existing commitments from the coalition agreements and Labour’s pre-election Fiscal Plan are factored in.

That is button-poppingly tight, and will require a large amount of fiscal discipline and a benign economic climate to achieve.

Economic outlook

Treasury is forecasting GDP to grow by around 2.9% on average over the five-year forecast period. This is a little flatter than projected in the Pre-election Economic and Fiscal Update (PREFU), reflecting poorer primary production arising first from the wet winter and now from the dry spring plus continued weakness in the housing market and lower household consumption.

The government’s policies – in particular, KiwiBuild and the phased increases to bring the minimum wage to $20 an hour – are expected to stimulate the economy from 2019-2020, lifting GDP growth and feeding into slightly higher inflation.

Wage growth of above 3% a year is forecast from 2019.

Fiscal outlook

The fiscal projections incorporate the policies within the government’s 100 Day Plan. This includes some big ticket items, in particular, the “free fees” post-compulsory education policy and the Families Package, to come into effect July 1 next year.

Finance Minister Grant Robertson described this as “transformational”. Treasury estimates are that, when fully in place, it will lift 88,000 children out of poverty and make 384,000 families with children better off by an average of $75 a week.

The HYEFU has the government hitting all of its Budget Responsibility Rules – maintaining surpluses, keeping spending down to around 30% of GDP and reducing net debt to 20% of GDP by 2020. But the operating allowance provision is very tight with $15.1 billion already accounted for – leaving just $6.6 billion headroom.

The pressure is already building through pay equity claims, the expectations created by the new government’s fairer society aspirations, demands for wage increases from teachers and the health workforce and unallocated spending promises inherited from the previous government.

The surplus track is for a surplus of $2.5 billion next year, $2.8 billion in 2019 and $5 billion in 2020.

The projected capex spend over the forecast horizon is $41.7 billion, of which $2 billion is earmarked for KiwiBuild and $7.7 billion for contributions into the NZ Super Fund.

The outlook, against the PREFU, reflects the change in fiscal priorities with the change in government.

Budget operating allowances$2.6 billion higher in Budget 2018, $1.9 billion in Budgets 2019 to 2021
Capital spending allowances$3.4 billion higher in Budgets 2018 and 2019, $3.1 billion higher in Budget 2020, $2.7 billion higher in Budget 2021
Surpluses$0.4 billion lower in Budget 2018, $0.7 billion lower in Budgets 2019 and 2020
Tax revenuesUp $1.5 billion in Budget 2019 and $2 billion in Budget 2020.  This reflects the unwinding of National's tax cuts, higher wage growth and higher GST. 
Net Crown debtUp $3.1 billion in Budget 2019 and $7.4 billion in Budget 2020.

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