Government and Fiscal Policy

Budget 2016 - More of the same

Thursday May 26, 2016

budgetwatch 2016 


From ‘A plan that’s working’ last year, we now have in Budget 2016 ‘Investing in a Growing Economy’.


Yes, the economy is growing.  There is no argument there.  The argument is now (or, perhaps, should be) about the quality, rather than the quantity of this growth.


With the Treasury forecasting average annual growth of close to 3.0% over the next 4 years, and Crown (OBEGAL) surpluses to over $6.7 billion in the 2019/2020 fiscal year, it remains a pertinent question if that growth is available to be shared – and, if so, how it is shared.


The Minister rightly points to the 200,000 more in jobs over the last 3 years, and the forecast additional 170,000 in jobs over the period to 2020.  Further, with the average annual wage rising to a forecast $63,000, there is much to applaud.


But, with such a positive story in terms of output measures, are we seeing similar improvements in outcomes – living standards, wellbeing, ora?


Yes, Budgets are functional documents setting government spending allocations across departments, programs, and votes.  But, arguably, Budget announcements are more important in indicating the priorities of a nation.  Our current priorities can be read from the $1.8bn of new spending announced for this year (and $6.5bn over the next 4 years) being:


  • $568m boost to health – which is unlikely to match the increasing needs from population and ageing change, but enough to standstill
  • $236m labelled ‘public infrastructure package’ – but is predominantly for IRD to upgrade its ageing IT systems
  • $151m ‘social investment package’ – which is a combination of a myriad of allocations
  • $107m ‘innovative New Zealand package’ – which updates science, R&D and tertiary education funding
  • by department, the largest new spending is for health, followed by core government services (including IRD), and $205m for justice sector (of which $72m is gobbled up by a forecast growing prison population).


In contrast, there is little suggestion of recommencing contributions to NZ Superannuation Fund anytime soon.  Meanwhile, genuine efforts to tackle housing affordability and child poverty are conspicuous by their absence.


And while the title is ‘investing in a growing economy’, there is a disappointing allowance for new capital spending – indeed it has been reduced to $1.4bn this year.  We can only ask, if not now, when?


The result is that the growth in our economic capacity remains modest at best – at less than 2.7% per annum.


tresury surp


The Treasury economic forecast remains unsurprising, with the export sector recovering after a weak 2016-2017 year.  The assumption that the world economy remains stable, with a recovery in trading partner growth and, so, commodity prices underpins the forecast.  Of course, any dislocation caused by Brexit is too bleak to consider, while a further slowdown in China is also a downside risk.


Interestingly, the forecast also holds on to a forecast reduction in annual migration inflow to 12,000 by the year 2019.  And, just as mechanically, annual house price growth is expected to slow from 8.9% for the 2015/16 year to 2.3% for the 2017/18 year.


However, despite a strong economy (and a government surplus), our external deficit of $8.7bn in the 2015/16 year grows to $14.4bn for 2019/20.  Consequently, the nation’s net international indebtedness is set to worsen – from currently 61% of annual GDP to close to 69% by 2020.



Last words

As the picture shows, there are ongoing allowances for new spending over coming years.  These are, however, not of a magnitude to significantly change the structure of our priorities in rebalancing the quality of our growth.  It is perhaps unfortunate, though, that coupled with the forecast budget surpluses some will see fertile ground for tax cuts.  Whether that becomes a priority for a country struggling to house its people will no doubt be settled through the democratic process.



Allowance for new operating expenditure