The Labour-led Government’s first Budget had to pass three tests. First, it had to build on its 100-day iniatiatives and meet its commitment to the electorate of greater investment in the core social areas of health, housing and education. Secondly, in the interests of a happy and sustainable coalition, it had to allow its coalition partners to point to key policy victories. Finally, and by no means least, it had to prove to a still sceptical business community that it could deliver on its commitment to key Budget responsibility rules.
Finance Minister Grant Robertson has managed a good balance between the three.
A strong economy helps and that is what this Government has inherited, along with a healthy set of fiscal accounts. The fact that revenue has been running ahead of forecast has allowed some buffer, especially as the higher revenue has been deemed sustainable.
Spending reprioritisation has also become de rigueur. The previous Government used this effectively and this Government has continued the trend. It’s good to see governments making calls on the quality (or otherwise) of government spending.
The projection of rising budget surpluses and falling net debt, to below 20% of GDP in 2022, is predicated on a continuation of good economic times. GDP growth is forecast to average 3% per annum over the next five years. That’s higher than our growth forecasts and points to downside risks to revenue and budget surpluses, and upside risks to debt.
One factor of continuing concern to the growth outlook is stubbornly low business confidence. That concern is only mitigated by the fact that firms are still modestly upbeat about their own prospects, which is the more critical driver of hiring and investment decisions.
But we are concerned that the longer general confidence remains low, firms’ expectations of their own outlook may come down to meet it. This is a key reason why the Government would have been so determined to portray a solid set of fiscal forecasts. The key fiscal ratios are the most observable indicators of a government’s ability to manage the economy.
The most critical of those ratios is the net debt target which the Government is expecting to comfortably meet by 2022. Note, however, that debt held by Crown entities is expected to rise from 0.5% of GDP to 2.2% by 2022. This isn’t included in core Crown debt (but should be). Fiscal smoke and mirrors.
Nevertheless, the lower core Crown debt ratio may well see renewed questions about whether the Government is using its balance sheet effectively and whether it should be investing more now, especially while interest rates are low.
Our view on this hasn’t changed. While economic times are good it’s prudent to have debt falling as a percentage of GDP. The bigger the buffer that is built up in good times, the more effectively the Government can respond when the next (inevitable) downturn arrives.
Plus the economy is already capacity constrained, especially in the key construction sector. We simply can’t build any more than we are currently building.
The Debt Management Office has made an only minor adjustment to the bond programme. Issuance is $1 billion per annum higher in each of fiscal years 2019, 2020 and 2021, though this is mostly offset by a $2 billion reduction in T-bills over the period.
There are no significant issues for the Reserve Bank of New Zealand in this Budget. There is still a reasonably significant positive fiscal impulse over the next two years, though it is now somewhat lower in 2018 and higher in 2019 than was signalled in the Half-Year Fiscal Update in December. That seems to us to leave the interest rate outlook on hold for the foreseeable future.
This is a credible and creditable start for the new government. But fiscal pressures are likely to only increase over time as structural trends such as demographic pressures become more problematic.
Also, by next year a raft of working groups, including social policy, education and tax, will have reported back. And Budget 2019 will be the first to incorporate the new living standards framework which we expect will come with additional calls for investment.
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