In Focus

BERL Budget 2015 Commentary

Thursday May 21, 2015 Dr Ganesh Nana



But, what is “the plan”?

Dr Ganesh Nana
Chief Economist


Budget 2015 documents carry the headline A plan that’s working.


But ‘the plan’ itself is, at best, unclear.  There is, though, an admission that rewards from our recent economic growth performance have not been enjoyed by a large proportion of our community.  This admission (albeit implicit) lies in the centrepiece of Budget 2015 being a redistribution package aimed a children in the poorest homes.


The redistribution package ($790m over 4 years) is a mixture of benefit and childcare subsidy increases, and Working for Families changes.  They, however, don’t come into effect until April next year and are also accompanied by more stringent work criteria.  Beneficiaries are now expected to work for 20 hrs per week once their youngest child turns 3 (previously 15 hours per week once their youngest child turned 5).


However, the economic foundations of this budget are, at best, wobbly – at worst, fragile.


A critical underpinning assumption is of a strong resurgence in global dairy prices over the next 12 to 18 months, so that by the end of 2016 they are some 60% up on now.  We suggest this is either a brave, or a foolish, assumption.


Without such a dairy price recovery the forecasts for economic activity and job growth become much more muted.


In addition there is an assumption that inwards migration heads down sharply, which takes the heat off house prices.  Although there seems little joy for businesses and exporters on the interest rates or the exchange rate front – with the Treasury projecting little change in these over the forecast horizon.


Indeed, even the Budget’s main, or central, forecast signals a slowing outlook – with last year’s 3.3% economic (GDP) growth being as good as it gets.


A plus from Budget 2015 is that we can now get past our irrational fixation with returning to a Budget surplus.  In a (again implicit) nod to economic realities, the Minister noted that past Budget OBEGAL balance forecasts have erred by anywhere up to $1bn either side of the actual outcome.  So, next year’s forecast surplus of $176m should be taken with a heavy dose of cynicism.  But that, rightly, is no longer the story.


Part of what should be the story is an ongoing an increasing current account deficit adding to the nation’s external debt position – expected to be about 75% of annual GDP in 2019 – up from the 65% now.



budget 2


So, while some might claim the plan is working, others might question what is the plan?


The plan – I hesitate to venture – may well be one of minimising government’s ability to do anything of substance.  In terms of new operating spend – there is the ‘new standard’ $1bn a year for new programmes, projects, ideas available for officials to scrap over.  However, more than half of this allowance is gobbled up by the extra spending required on health, education and superannuation arising from population changes.


Thus there is little allowance for anything different.  So, expect more of the same.


Although, noticeably, the operating allowance for 2017/18 is set at $2.5bn.  The open secret is these are for tax cuts.  Perhaps that is the extent of ‘the plan’?


However, glitch(es) in the plan remain(s) within the economic scenario.  A lot needs to go New Zealand’s way (i.e. we need to be lucky) for ‘the plan’ to work out.   But a lot has already gone our way recently (e.g. historically high prices for our products), so our good run just may continue.


I’m just not sure whether this is what I would call ‘a plan’.