NZ Budget18: no surprises

Fiscal accounts are in a strong position relative to many international peers and that provides options should economic risks materialise – as they tend to do eventually. 

"There is a clear infrastructure deficit and done well, infrastructure investment pays for itself.”

NZ Labour’s first budget forecast the country’s operating surpluses to grow and net core debt to fall below 20 per cent of gross domestic product by 2022.

Both revenues and expenses are higher, with Operating balance before gains and losses (OBEGAL) surpluses little changed. On the operating expenditure side, health and education gobbled up most of the cash available, as they tend to do.

Core Crown tax revenues got a $NZ5.7 billion cumulative bump, owing to persistence in the stronger starting point, policy tweaks and a stronger nominal GDP outlook. 

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The lower starting point for net core debt persists across the forecasts but declines more gradually to a similar end point. Core Crown cash flows remain in deficit one-year longer than previously forecast and do not reach surplus until 2022.

Accordingly, the nominal value of net debt does not begin to decline until 2022 (previously 2021).

OBEGAL surpluses are projected to rise from $NZ3.1 billion (1.1 per cent of GDP) to $NZ7.3 billion (2.1 per cent of GDP) by June 2022. With the exception of the 2019 fiscal year the OBEGAL profile is broadly similar.

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As things stand, ANZ Research would have liked to see a bit more capital spending. There is a clear infrastructure deficit and done well, infrastructure investment pays for itself. But it is a balancing act and - given how quickly the world can change - it is hard to take a firm line that this is a mistake.  

The NZ government needs to ensure their spending doesn’t compete with and crowd out private activity. This is why the focus should be on a long, relatively smooth forward-looking pipeline of prioritised infrastructure spending, with the option to ramp up if economic activity were to soften.

Given the pressures we’re seeing on infrastructure and the likely balance of risks around Treasury’s economic outlook, we suspect the debate on loosening fiscal targets is not over. For Budget 2018, prudent pragmatism is the order of the day.

Expansionary

On the funding side, NZDMO’s bond issuance guidance has been lifted by $NZ1 billion to $NZ8 billion in the 2019, 2020 and 2021 fiscal years, while 2018 and 2022 are unchanged at $NZ7 billion.

Over the five years to June 2022, total bonds issued are expected to be $NZ38 billion. Two thirds of the increase is owing to a reduction in short-term funding through Treasury bills.

In terms of off-balance sheet funding, there was little to report, which ANZ Research views as a good thing.  

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Total capital spending is broadly unchanged at $NZ42 billion over the next five years. However, capital allowances have been lifted $NZ0.4 billion this year and $NZ0.3 billion in each of the following years. This increase partially reflects some large projects being pushed outside the forecast period and some reprioritisation.

The KiwiBuild capital injection has been pushed out, with the impetus to residential investment halved from a cumulative $NZ5.4 billion to $2.5 billion over the next five years. ANZ Research suspects this may speak to the lack of capacity in the sector.

Anticipated growth in real activity has been downgraded in the years to June 2018 and 2019, but upgraded later in the forecast period. The downgrade reflects a weaker end to 2017 and the drag from agricultural production over the summer.

Overall, this brings NZ Treasury’s economic outlook more in line with our own view, which is for growth to hold up around trend out to 2019. The lift to 3.4 per cent growth in 2020 still appears optimistic to ANZ Research.

Miles Workman is an Economist and Sharon Zollner is Chief Economist at ANZ NZ