Budget 2012 is a product of the times. A “zero” budget was the only real option open to the government as it works to get back to surplus and start repaying debt again. That remains an important goal in an environment in which markets (and rating agencies) are paying close attention to countries financial accounts, especially those reliant on financing from global capital markets.
The strongest feature of this budget is expenditure restraint with new initiatives being funded out of reprioritised spending. That’s an excellent process and one that we would support regardless of the health of the Government’s finances or the state to the economy.
The Government has had a lot to cope with over the past four years. The Global Financial Crisis and the Canterbury earthquake have been significant economic, and therefore also fiscal, events. The good news is that the New Zealand Government’s finances were in good shape before those events. They are therefore able to be put back into shape without too much pain.
· A deficit of 4.1% of GDP in 2012, down from the earthquake impacted 9.2% in 2011.
· The deficit improves to 3.6% of GDP in 2013, and a small surplus is forecast in 2014/15.
· The Budget includes new spending of $4.4 billion over 4 years. That is funded by new revenue measures that are expected to raise $1.4 billion over 4 years and $3 billion over 4 years funded out of reprioritising existing expenditure
· The targeted proceeds of $5-7 billion from selling minority shares in five SOEs will be funnelled into the Future Investment Fund to invest in modern schools, hospitals, innovation, and transport.
· Net core crown debt as a percentage of GDP is set to rise from 25% in 2012 to a peak of 28.7% in the June 2014 year. It then falls to 27.7% of GDP in 2016.
· The Treasury is relatively optimistic on the economic outlook, expecting GDP growth to climb to a peak of 3.4% in the March 2014 year (AMP Capital 2.9%). Their growth assumptions are higher than ours through-out the forecast horizon, which infers downside risk to the Government’s revenue forecasts.
· We broadly agree with the Treasury’s forecasts for consumption and the external sector, but we appear to differ most on the magnitude of the impact from the Canterbury rebuild.
· The government sees the unemployment rate dropping steadily over the forecast period, to 4.7% by 2016. That is a slightly faster decline than we currently envisage.
· The Treasury sees the current account deficit heading back to around 6% of GDP over the next couple of years. We concur.
The fact that New Zealand is able to get its fiscal house back in order without all the extreme angst that is currently playing out in Europe is reason in itself to get the books back in order. In that regard we welcome the Government “proposing changes to the fiscal responsibility provisions of the Public Finance Act , including seeking parliamentary support to legislate for a limit on increased spending based on inflation and population growth”. Such a provision would help ensure a focus on the quality of government spending. That’s a good thing.
While we may be avoiding extreme angst, fiscal consolidation is having a negative impact on GDP growth. The negative fiscal impulse from the Budget lowers GDP growth by 2.0% in the year to June 2014 and 1.1% in the June 2015 year. That’s not insignificant.
There are limited implications for the Reserve Bank in this Budget. In terms of our own monetary policy view, this doesn’t change anything for us either. The Treasury’s interest forecasts are a tad lower than ours, even though our GDP growth expectations are lower. There are a lot of possible reasons for that difference – as you know we are concerned about the capacity of the economy to grow (structural unemployment and potential GDP).
All in all it’s a good Budget. There’s nothing in here to spook the markets or the rating agencies.