Budget 2018 - A carthorse, not a show pony

Most budgets are forgettable and those which do go down in history - Nordmeyer’s 1958 Black Budget and Ruth Richardson’s 1991 Mother of All Budgets – are usually politically damaging for their authors.

Clearly the Government’s assessment is that the risk with Budget 2018 is that it will be seen to do too little rather than too much - which is why senior ministers have spent the last several weeks assiduously managing down expectations.

We share our view of what to expect on Thursday.

An ‘old school’ budget

Although the Government has been promoting itself and its mission as “transformational”, we expect Grant Robertson’s first budget to be ‘old school’ Labour, with the big money going to health and education – both of which are struggling under serious capacity issues.

Robertson has said that the budget will have “the rebuilding of critical public services at its core”.

But this is a three-way government so there are other agendas in play.

New Zealand First has snagged a $900 million boost for the Ministry of Foreign Affairs and Trade and has apparently delivered to the provinces, with Robertson promising that the budget will contain “the biggest investment in the regions of New Zealand seen in our lifetimes”.

The Greens have scored a significant increase in the Department of Conservation’s budget for predator control and have the portfolio to lead New Zealand’s climate change response.

Some extra fiscal headroom

Labour is holding firm to the Budget Responsibility Rules agreed with the Greens before the election, although the Greens’ support – always wobbly - seems to be weakening by the minute.

What this means for Thursday’s budget is that spending must remain at around current levels and net Crown debt must be on course to drop below 20% of GDP by 2022. These targets were always going to require discipline and have become even more of a strait jacket given rising wage pressures across the public sector.

But, as Robertson has plotted his first budget, he has received some good news to counter the bad.

The fiscal position has improved since the Half Year Economic and Fiscal Update (HYEFU), published on 14 December.

  • The surplus is now tracking at $3.3 billion, almost $1 billion ahead of the HYEFU forecast, and
  • the Government’s new spending headroom will be boosted by $1.4 billion over the next four years through a combination of cuts to existing expenditure and tax policy changes – e.g. the extension of the bright line capital gains tax to five years and the proposed “Amazon” tax.

These are small movements in the context of the Government’s balance sheet but will resonate in the “noise” of the budget.

The engine of the Government’s spending is in the baseline funding, reported in the bulky Estimates of Appropriations documents. To continue the car metaphor, the budget commentary is about the car’s body – it focuses on the shiny stuff, the spending shifts and new initiatives.

Capital budget

Robertson has announced that Budget 2018 will invest $42 billion in net capital spending over the next five years. Two points should be made about this.

  • The figure has scarcely budged since the HYEFU, indicating that most of the cash influx since then will go to operational spending or be held in reserve as ballast against future costs, and
  • the $42 billion will be supplemented by the private sector through a variety of innovative finance mechanisms to fund infrastructure.

The last of its kind?

The Government has embraced the Living Standards Framework being developed by the Treasury. Essentially this looks beyond the traditional GDP metrics to measure policies against a more holistic, community and sustainable definition of success.

The mechanics of how to accommodate this ethos within the budget presentation are still being worked through by the Treasury but Robertson is confident that sufficient progress will have been made to enable him to make his second budget New Zealand’s first “Wellbeing Budget”.

Whether this new reporting methodology will become embedded and engender over time a different mind set toward New Zealand’s economic, social and cultural management will be of interest not only in New Zealand but internationally.

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