NZ: Expect to see strict adherence to the Budget Responsibility Rules - ANZ

Miles Workman, Economist at ANZ, suggests that in the NZ Government’s first Budget they expect to see strict adherence to the Budget Responsibility Rules, including a projected return of net core Crown debt to 20% of GDP within five years.

Key Quotes

“Consistent with this, the Government has announced that it has reprioritised around $700m in spending over four years (including a halt to irrigation subsidies). While in the grand scheme of things this isn’t a large number, it confirms the Government remains committed to achieving its debt target. But given tough trade-offs about spending priorities it seems unlikely they will be aiming to overachieve on that front, and we expect some strong messaging around spending pressures and the need to push these targets to their limit.”

“Revenues should get a small bump from the new “Amazon tax” (GST on online purchases under $400), the removal of negative gearing on investment property, and the targeting of foreign and multinational companies on the tax front. In addition, the starting point for the Government’s books is stronger than forecast in the 2017 Half Year Update.”

“Together, the higher stating point and small bump in revenue provide the Government with a few options. But we expect there will be little room for additional sweeteners of any significant size.”

“We suspect the Treasury will maintain an upbeat economic outlook that will flatter the fiscal books. We expect an outlook broadly similar to that in the Half Year Update, which had real GDP growth at 2.9% and 3.6% in the years to June 2018 and 2019 respectively. Nominal GDP growth averaged close to 5% per year over the five year forecast horizon. While it’s likely that Treasury’s near-term activity forecasts will be downgraded modestly (reflecting a softer finish to 2017), the medium-term forecasts should remain upbeat.”

“From a stronger starting point, we expect to see slightly smaller improvements in the OBEGAL surpluses and a slower decline in net core Crown debt than in the Half Year Update.”

“Stepping back, New Zealand’s fiscal accounts are in a strong position relative to many international peers and that provides options should economic risks materialise. However, as things stand, we think there is room for a bit more capital spending.”

“Given the pressures we’re seeing on infrastructure and the likely balance of risks around Treasury’s economic outlook, we suspect the debate on loosening fiscal targets is not over. But for Budget 2018, the Government will be eager to show it can deliver on its Budget Responsibility Rules in a pragmatic and prudent fashion.”