Budget Preview 2017

By AMP Capital

The Government will have been looking forward to Budget 2017 (Thursday May 25th) for a long time. They have navigated various fiscal challenges, including the Global Financial Crisis, and a string of seemingly never-ending natural disasters, including earthquakes in Christchurch and Kaikoura and more recently flooding in Edgecumbe.

At the same time, they have had to continue to invest in infrastructure to meet the needs of a strongly growing population and manage the books in a suitably prudent manner.

More recently, the Government has talked up the “choices” their prudent fiscal management would make available once the books were back in order. In an undoubtedly happy confluence of factors, those choices are now available and about to be laid out in an election year.

This Budget marks a watershed moment in the electoral cycle. Having laid out the fiscal outlook and the choices the National-led Government has made, the Budget also provides the fiscal parameters for the Opposition parties to lay out the undoubtedly different choices they would make were they to assume the Treasury benches in September.

Recent developments
The Half Year Economic and Fiscal Update forecast an operating surplus (OBEGAL) of $473 million for the current fiscal year. Latest data from the Treasury shows the surplus running significantly higher. In the nine months to 31 March OBEGAL came in at $1.5 billion versus a forecast of $147 million, or $1.3 billion ahead of forecast. To the extent that this divergence from forecasts is due to permanent factors, this will set a higher starting point for OBEGAL forecasts into the future.

The outlook will of course also be dependent on the economic outlook. Without wanting to go so far as to predict what other forecasters are likely to forecast, key developments that will impact the near term projections have been lower than expected growth at the end of 2016 and higher than expected inflation at the start of 2017. For the fiscal forecasts its nominal GDP that matters most, so these two developments tend to cancel each other out.

On balance, the Treasury will still be expecting a solid (and probably still more optimistic than ours) GDP growth outlook which will continue to underpin a series of healthy and rising surpluses over the projection period.  

NZ Treasury, Statistics NZ, AMP Capital

We expect the Government will still be projecting surpluses of towards 3% of GDP by fiscal year 2021. This is an enviable fiscal position to be in. Compare this to our cousins across the Tasman whose Budget last week projected a continuing run of fiscal deficits.

Source: HYEFU, NZ Treasury

Pre-Budget speeches from both the Minister of Finance Stephen Joyce and Prime Minister Bill English have laid out the key themes for the Budget this year, and they remain largely unchanged from what we have come to expect from this Government.

Fiscal prudence will remain a key feature. Mr Joyce has signalled a new and more ambitious commitment to reducing debt. The Government will now target a net debt to GDP ratio of between 10% and 15% of GDP by 2020, which is lower than the current target of 20%.

The Minister has also announced a more than doubling of planned infrastructure spending over the next four years, details of which will be released in the Budget. We expect this will be focused on housing, reflecting the needs of a growing population and an area of weakness for the Government as the September election fast approaches.

He has also talked up the likelihood of a reduction in the tax burden “and in particular the impact of marginal tax rates on lower and middle income earners”.  This will be the ‘big reveal’ in the Budget and will come in the form of changes to the tax bracket thresholds with adjustments to Working for Families entitlements. This will be structured to provide maximum benefit to middle-income New Zealand.

Better social services was highlighted in the Prime Minister’s pre-Budget speech and will also be a key feature of the Budget.  This Government has turned the approach to social spending on its head, and in a good way. In fact, when the history books get written after a period of reflection, the lasting legacy of this Government will be its shift in emphasis from social spending to social investment. At its centre is the belief that intervening early to help most at risk people is the key to them lead better, happier lives that are more likely to be independent of state assistance in the long-term. In other words, it’s about intervening early to reduce the need for the proverbial ambulance at the bottom of the cliff.

Pre-Budget announcements:
As has become common in recent years, there has already been a plethora of spending announcements. These include:

  • $821 million for reinstating State Highway 1 between Picton and Christchurch
  • A Social Investment Package totalling $321 million over four years, including $68.8 million towards supporting vulnerable children
  • $60 million over four years for Pharmac to provide New Zealanders with access to new medicines
  • $27 million over four years for marae and Maori housing
  • $74.6 million over four years for the Innovative New Zealand programme to meet the growing demand for Callaghan Innovation’s research and development Growth Grants
  • $178 million for tourism infrastructure, including $76 million for Department of Conservation infrastructure
  • $303.9 million to support the continuation of the New Zealand screen industry production grants, both globally and domestically
  • $59.2 million over four years to ensure all road ambulance call-outs are double-crewed
  • $10.1 million over two years to preserve New Zealand’s documentary heritage
  • $21.3 million for the Department of Conservation’s ‘Battle for our Birds’ campaign
  • $5.2 million to fund more teachers in priority subject areas
  • $26.7 million over three years plus a $63 million capital boost for better freshwater management. 

With a lot already announced, Budget day will be reserved for the big announcements, focusing on the areas where the Government thinks they will gain most political capital (tax changes), or dealing with areas of political vulnerability (housing).

Budgets have become really boring. The days of big surprises on the day have long gone. Much is announced beforehand and there is very little room for massive surprises on the day. We expect exactly the same this year – in fact I’m predicting now my post-Budget blog next Thursday will be shorter than this preview.

Given the fiscal parameters are well understood and many of the decisions have been well telegraphed, we see little in the way of implications for markets on the day. In particular, we anticipate little change to the bond tender programme.

The more interesting aspect of the Budget will be the response from the Opposition parties as they frame up their alternative choices in the hours and days after the Budget. This will start to give markets an idea of what an alternative Government will look like, at least fiscally.

The interesting aspect of that is in order to do anything significantly different there will be an equal offset somewhere else. The Government has left their political opponents little wriggle room, especially with the new debt target. 

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Important notes

This blog post has been prepared to provide general information and does not constitute financial advice in accordance with the Financial Markets Conduct Act 2013. An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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