New Zealand’s fiscal accounts remain healthy by global comparison with the Government bringing down a Budget that attempts to meet the Wellbeing criteria by increasing spending in key social areas while at the same time maintaining rising budget surpluses and falling net debt.
Operational spending rises $15 billion over the next four years with the spending allowance for 2019 raised to $3.8 billion with $3.0 billion allowed for 2020. That’s up from the previous allowances of $2.4 billion for each of those years. That makes fiscal policy a tad more stimulatory (to be precise, slightly less contractionary compared to previous forecasts) over the next few years than we have been assuming.
Budget surpluses are lower but remain positive. After a dip lower to 0.4% of GDP in 2020 from an estimated 1.2% of GDP in 2019, the surplus is expected to rise to 1.7% of GDP by 2023. Over the next five years though, budget surpluses are a cumulative $9 billion lower.
In dollar terms net debt is higher than previously forecast, but falls as a percentage of GDP once we get into the back-half of the projection period. Unsurprsingly the ratio dips just below 20% of GDP, 19.9% in fact, by 2022.
Higher spending, continued budget surpluses and a falling net debt trajectory (at least as a percentage of GDP) all come courtesy of a robust economic backdrop.
But therein lies the risk to the outlook. We have long argued that Treasury growth forecasts look optimistic and this time is no different. This time it’s in the immediate period ahead with Treasury forecasting GDP growth of 3.0% for the year to June 2020 compared with our expectation of 2.6%. We are closer in the out-years.
The risk for the Government is growth does not meet expectations, revenue falls short and spending needs to revised lower or debt higher.
That said, the Government has already flagged a more flexible approach to the debt target by indicating a move to a 15-25% of GDP target range. That’s something that doesn’t cause us any problems – at some point it will be necessary for fiscal policy to become more stimulatory.
While we haven’t agreed with prior calls from some for the Government to relax its debt target, we have argued that such a move would be prudent at some point in the future. After all, that’s why it’s necessary to get debt down in the first place – to give fiscal policy room to move to the expansionary when the economic cycle turns down. That’s especially the case as monetary policy becomes increasingly impotent. New Zealand is fortunate in this regard.
The Debt Management Office announced the bond programme would be a cumulative $5 billion higher over the period 2019-2023. The downside risk to growth and tax revenues means we see the risk to debt issuance as being to the upside. No doubt more on that in future Budgets.
This is the Government’s first Wellbeing budget. The approach has much merit and we have been keen supporters of the development of the Living Standards Framework.
Around the world right now we are seeing the political unrest and polarisation that has come from wellbeing being insufficiently front and centre of the policy making process. The approach will take time to embed and progress towards meeting wellbeing targets will be slow. But it is a move in the right direction in terms of focussing policymakers on a broader range of outcomes.
But like it or loathe it, GDP still matters. At the end of the day it’s growth in the economy that determines the tax revenue raised which determines how much can be spent, and even borrowed. Indeed debt relative to (nominal) GDP will remain a key metric for rating agencies to determine the sustainability of the Crowns fiscal position.
As well as the risk from lower growth, another critical factor is whether the Government has allowed for the ever-rising spending pressures, mostly in the form of higher public sector wage demands. Teacher strikes this week are a clear and obvious example of those pressures.
To that end it would be remiss of me not to provide my annual warning that some elements of New Zealand’s fiscal framework remain unsustainable.
I worry less about the affordability of New Zealand Superanution (NZS) than I do about its opportunity cost. The longer we continue to commit to universality of NZS from age 65, the more difficut is going to be to meet rising spending demand in other areas.
From a markets perspective New Zealand continues to enjoy a healthy set of financial accounts. We especially like the fact that after a decade of hard work building the fiscal buffers, we have fiscal room to move in the next downturn.
There are risks in the projections and we would be surprised if everything panned out as described in the projections in today’s document, but the risks are managable.
And let’s face it: if you’re going to sell NZ bonds on fiscal risks, whose are you going to buy?
For further Budget 2019 discussion, listen to our webinar recording here.
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