Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search

 


Government has learnt a GFC lesson | Op-ed By Aaron Quintal

"Budget 2014 was the first budget in many years to be delivered in what could be called “normal” economic conditions. New Zealand’s economic growth for the forseeable future is modest but robust, underpinned by the Christchurch rebuild, record high terms of trade and high producer and consumer confidence. These are conditions that many of our trading partners (not least Australia) would crawl over broken glass to enjoy. But the rosy outlook is not without its risks and it is management of these risks that seems to have been front of mind for Bill English." - Aaron Quintal, Tax Partner EY NZ

Government Has Learnt a GFC Lesson


By Aaron Quintal

So the government kept its promise to return to surplus, just. The surplus is forecast at $372 million for 2014/15 and expected to grow to $3.5 billion in 2017/18. The surplus is being driven by both increased tax revenues and government expenditure growing slower than the rest of the economy.

Crown tax revenue is expected to reach $77.6 billion by 2017/18, $18.9 billion higher than 2012/13 driven mostly through growth in PAYE and GST. Core Crown expenses are expected to increase in nominal terms by $11.1 billion from 2014 to 2018, but this is slower than forecast economic growth, so as a percentage of GDP Crown expenses should fall from 33% of GDP in 2012/13 to 29.9% in 2017/18.

Keeping a watchful eye

Budget 2014 was the first budget in many years to be delivered in what could be called “normal” economic conditions. New Zealand’s economic growth for the forseeable future is modest (peaking at 4%) but robust, underpinned by the Christchurch rebuild (which is taking longer than first anticipated), record high (but declining) terms of trade and high producer and consumer confidence (sustained by a strong labour market and growth in key trading partners). These are conditions that many of our trading partners (not least Australia) would crawl over broken glass to enjoy. But the rosy outlook is not without its risks and it is management of these risks that seems to have been front of mind for Bill English.

At the start of the GFC, New Zealand’s net Crown debt was an enviable 5.5% of GDP. This low net debt, and the headroom it gave the government to run deficits and borrow during the bad times, played a key part of New Zealand coming through the GFC in a much better position than many of our contemporaries.

Rebuilding the all-important buffer

The government has learned an important lesson from this experience and wants to rebuild that buffer for the future. It is clear that nothing will take priority over getting the level of debt down. Any hints of tax cuts or promises of restarting contributions to the New Zealand Superannuation Fund are foremost contingent on getting net debt down. If the economy does better than is expected over the next few years, that extra money will go back to repaying lenders well before there is any sniff of tax cuts.

Barring a major disaster (natural or financial) the government certainly hopes to deliver what the Minister called “modest” tax cuts. The earliest these can practically be delivered within the constraint of getting net debt down is 2018/19.

Low rates are not forever

Interest rates remain a major risk for the economy. The remarkably low interest rates we have had since the GFC will not continue. The government is forecasting short-term interest rates rising from their current level of 2.5% to 4.3% in March 2015 and rising even higher in the future. Any increase above this level will stifle growth and hurt the government’s revenue forecasts. With inflation expected to peak at 2.5% in 2016, the government doesn’t want to do anything that would further fuel inflation. The advice they have received is $1.5 billion growth in spending each year is all the economy can take before inflation becomes an issue and interest rates rise even further.

Given the way the economy is heading, the best the government hoped to do in this Budget was get out of the road and let the economy do its thing.

*************

Aaron Quintal is a tax partner in the EY Auckland office and leader of the Tax Policy Group. Aaron is a regular presenter at conferences and media commentator. He is also the editor of EY's Tax Watch newsletter.

ENDS

© Scoop Media

 
 
 
 
 
Business Headlines | Sci-Tech Headlines

 

Must Sell 20 Petrol Stations: Z Cleared To Buy Caltex Assets

Z Energy is allowed to buy the Caltex and Challenge! petrol station chains but must sell 19 of its retail sites and one truck-stop, the Commerce Commission has ruled in a split decision that acknowledges possible retail price coordination between fuel retailers occurs in some regions. More>>

ALSO:

Huntly: Genesis Extends Life Of Coal-Fuelled Power Station To 2022

Genesis Energy will keep its two coal and gas-fired units at Huntly Power Station operating until 2022, having previously said they'd be closed by 2018, after wringing a high price from other electricity generators who wanted to keep them as back-up. More>>

ALSO:

Dammed If You Do: Ruataniwha Irrigation Scheme Hits Farmer Uptake Targets

Enough Hawke's Bay farmers have signed up for water from the proposed Ruataniwha Water Storage Scheme for it to go ahead as long as a cornerstone institutional capital investor can be found to back it, its regional council promoter announced. More>>

ALSO:

Reserve Bank: OCR Stays At 2.25%

Reserve Bank governor Graeme Wheeler kept the official cash rate at 2.25 percent, in a decision traders had said could go either way, while predicting inflation will pick up as the slump in oil prices washes out of the data and capacity pressures start to build in the economy. More>>

ALSO:

Export Values Down: NZ Posts Biggest Annual Trade Deficit In 7 Years

New Zealand has recorded its biggest annual trade deficit since April 2009, reflecting weaker prices of agricultural commodities such as dairy products, beef and lamb, and increased imports of vehicles and machinery. More>>

ALSO:

Currency Events: NZ's New $5 Note Wins International Banknote Award

New Zealand’s new Brighter Money $5 note has been named Banknote of the Year in a prestigious international competition. The $5 note was awarded the IBNS Banknote of the Year title at the International Bank Note Society’s annual meeting. More>>

ALSO:

Get More From Scoop

 
 
 
 
 
 
 
 
 
Business
Search Scoop  
 
 
Powered by Vodafone
NZ independent news