Budget 2011: NZ back in surplus by 2015 as economy rebounds, government puts brake on expenses
By Jonathan Underhill
May 19 (BusinessDesk) – New Zealand’s Budget will return to surplus by 2015, a year earlier than projected, based on the government’s forecast for resurgent economic growth, augmented by savings from KiwiSaver, Working for Families and student loans.
The operating deficit is forecast to peak out at $16.7 billion in the year ending June 30, melting away over the next three years before turning to a surplus of $1.3 billion in the June 2015 year. Core Crown expenses are forecast to rise 5.9% to $77.1 billion in the five years to 2015 while core revenue soars 34% to $76.4 million, the Treasury projections show.
Central to revenue growth is the forecast path for nominal gross domestic product, which is for 5.3% growth in the year ended March 31, capturing the hike in GST last October, 4.7% in 2012 and then speeding to 6.4% in 2013, when the impact of the Christchurch rebuild is deemed to be most evident. Nominal GDP is forecast to grow 4.9% in 2015.
“There are good reasons to believe we’re in for a period of reasonable growth,” Finance Minister Bill English told the media and analysts at the Budget lock-up in Wellington.
Earthquake fund inflows of $15 billion to $20 billion, high export prices and competitiveness against Australia at “the best it has ever been” will stoke jobs and incomes, he said.
The extent to which the projections depend on a bullish estimate of revenue growth are highlighted by the gap between the Treasury and Inland Revenue forecasts for the total tax take.
For 2015, the Treasury is estimating $68.5 billion and IRD expects $67 billion of total tax – a difference of $1.5 billion that would erase the forecast operating surplus. The gap adds up to $4 billion over the five June years 2011 to 2015 with much of that difference reflecting the IRD’s more conservative track for a bounce back in corporate tax.
Export receipts would also be helped by the Treasury’s prediction for a weakening New Zealand dollar, which it sees dropping about 14% to 56 by 2015 on a trade-weighted basis from last year’s level of 65.3. The 90-day bank bill climbs to 5% from 2.7% in the same period.
English’s third Budget is far from being a black Budget of austerity and may help the government walk the difficult line between appeasing ratings agencies Standard & Poor’s and Fitch Ratings while avoiding scaring the electorate and denting National’s overwhelming popularity in election year.
English has found about $3.5 billion of savings from KiwiSaver, Working for Families and student loans across the next four years, with KiwiSaver alone accounting for $2.6 billion of savings.
Changes to KiwiSaver raise the minimum employee contribution and the compulsory employer contribution to 3% from 2% starting April 1, 2013. The employer contributions lose their tax-free status from April next year and will be taxed at the employee’s marginal rate.
From June 2012, the Member Tax Credit rate will halve to 50 cents for every $1 contributed by members up to a maximum $521 a year – half the current maximum. The government has left the $1,000 Kick-Start payment intact.
Working for Families will yield $448 million of savings over four years, as the abatement threshold is reduced to $35,000 from $36,827 while the abatement rate rises to 25 cents in the dollar from 20 cents. The Family Tax Credit for children over 16 years will be aligned with that for those aged 13-15.
The student loan scheme will provide total savings of $447 million over four years by restricting eligibility to students overdue with payments, limiting students aged 55 and over to borrowing only for tuition fees and removing entitlements for part-time students to borrow for course costs.
The repayment holiday for borrowers based overseas is shortened to 1 year from 3 years and the definition of ‘income’ will be broadened for student loan repayment purposes.
English found $980 million of savings over three years from the state sector, starting in July 2012, though $650 million of that comes from forcing 100 state agencies to fund their own employer contributions to retirement schemes.
A further $330 million comes from savings in government administration from 31 core government agencies.
At the same time, the government plans – if re-elected – to commence with the sell-down of its holdings in state coal miner Solid Energy, power companies MightyRiverPower, Meridian and Genesis, and of its three-quarters stake in listed airline Air New Zealand. The government estimates the sales, likely to be by initial public offerings, will generate $5 billion to $7 billion over the next 3-5 years.
The government would retain at least 51% in each of the companies and hopes to generate enough local interest to give the sales a ‘people’s float’ atmosphere. KiwiSaver funds, institutions including the Accident Compensation Corp. and iwi groups are expected to participate as well as mums and dads, according to the Budget statements.
The IPOs would be a boon to the New Zealand stock market, swelling its market capitalisation by about 10%, according to a Treasury estimate.
The measures announced in the 2011 Budget will reduce the Crown’s borrowing requirements by about $10 billion by 2015, English said.
That means the Debt Management Office’s $20 billion of bond issuance in the current June year marks the peak of such sales, with a gross $13.5 billion planned for 2012, falling to $8 billion by 2015.
The government announced a $5.5 billion Canterbury Earthquake Recovery Fund, which will be partly funded by the sale of a new Kiwi Bond, which will initially pay annual interest of 4%. English didn’t specify the total value of those bonds to be sold.