Budget 2014 lifts government
spending by $1.5 billion or 2 per cent in the coming year,
but that will represent a cut in real per capita
A surge in net immigration - largely driven by fewer New
Zealanders leaving for Australia and more returning - is
pushing population growth over 1 per cent, while the Reserve
Bank forecasts inflation to be 1.9 per cent in the year to
The Treasury, like other forecasters, has been surprised by
the rapid turnaround in net migration flows. The Budget
forecasts the annual gain to peak at 38,000 later this year,
from 32,000 now, but it also sketches an alternative scenario
where it hits 42,000, which would increase the population by
nearly 1 per cent even before natural increase (birth minus
The $372 million fiscal surplus forecast for the 2014/15 year
is only around 0.5 per cent of forecast revenue and well
within the margin of error for the operating balance
(excluding gains and losses). Three quarters of the way
through the current year the tax take is running $900 million
or 2 per cent below forecast.
For Budget 2015 and beyond the Government has increased from
$1 billion to $1.5 billion the operating allowance, which is
the amount it allows itself for new initiatives, whether
spending increases or "modest" tax cuts.
Finance Minister Bill English emphasised the need at this
stage of the economic cycle for the Government's fiscal
policy not to put upward pressure on interest rates.
A $500 million increase in the operating allowance for future
Budgets was around the upper limit before it would materially
impact on interest rates, he said.
Treasury advice released yesterday concluded that lifting
future operating allowances by $500 million per Budget would
have an upward impact on the official cash rate of around 15
to 30 basis points, if it took the form of higher government
spending, and around 10 to 20 basis points if it was used to
It would also lift the real exchange rate by 0.5 to 1 per
cent for around three years.
Overall the Treasury it expects fiscal policy to be
contractionary - that is, subtract from demand in the economy
- by around 0.7 per cent of gross domestic product per annum
over the next three years.
"We are trying not to repeat the mistake of the previous
cycle when runaway Government spending pushed mortgage rates
above 10 per cent," English said. "It is tempting to crank
another $1 billion out in spending but households, who have
pretty high debt, will pay a price for that."
Measured against the size of the economy government spending
is forecast to ease from 31 per cent now to just under 30 per
cent in four years' time.
This is not in line with English's reported comments to party
faithful in Queenstown at the weekend when he spoke of
wanting to get that ratio down to 25 per cent in six or seven
Even with an extra $500 million for spending or tax cuts
pencilled in for future Budgets the Government's net debt is
forecast to fall to 20 per cent of GDP by 2019/20, allowing
contributions to the New Zealand Superannuation Fund to
resume that year.
"After net debt has gone below 20 per cent of GDP we intend
to maintain it within a range of 10 to 20 per cent of GDP
over the economic cycle, while also making contributions to
the New Zealand Superannuation Fund," English said.
Standard & Poor's reaffirmed its AA+ rating on New
Zealand Government debt.
The Budget forecasts economic growth to pick up to 4 per cent
by March next year before easing back to 3 per cent the
following year and 2.1 per cent in the two years beyond that.
The Treasury is forecasting stronger near-term growth in
private consumption than it was six months ago, with real
wages rising 0.9 per cent in the year ahead and 0.6 per cent
the year after.
The unemployment rate is forecast to drop below 5 per cent by
2017 but still be above the level it estimates would put
upward pressure on inflation.
The current account deficit is forecast to widen from $7
billion or 3 per cent of GDP now to $17 billion or 6.3 per
cent of GDP in four years.
- By Brian Fallow of
the NZ Herald