Low inflation, ACC changes slash $3.2B from Crown balance, as KiwiSaver perk axed to help kids
By Jonathan Underhill
May 21 (BusinessDesk) - New Zealand’s weak inflation and ACC levy cuts contribute to a four-year, $3.2 billion reduction in the Crown’s operating balance in Budget 2015 versus the half-year update, prompting Finance Minister Bill English to axe savings incentives to fund welfare priorities.
The operating balance excluding gains and losses (Obegal) is forecast to be a deficit of $684 million in the year ending June 30, slightly wider than the $572 million deficit projected in December, while the 2016 surplus is whittled back to $176 million from $565 million.
While the tax take is revised down, the government has kept future operating allowances unchanged from the half-year update, while announcing new spending such as increased family benefits and childcare as part of a flagship $790 million child hardship package.
All up, new operating spending over the next four years amounts to $6.1 billion, of which $2 billion is funded “through reprioritisation and increased revenue.” To help finance that, English has found $500 million of savings over four years from scrapping the $1,000 kick-start payment to people enrolling in KiwiSaver. A levy on cross-border travellers to fund passenger-related biosecurity and customs services at the border will raise $100 million a year.
“The overall trajectory has not changed,” English said in Wellington. “We’re making good progress on the government’s fiscal priorities and the outlook is positive. The Treasury is predicting solid growth, growing employment and real wage increases. However, lower inflation means tax revenue is not rising as quickly as expected.”
Tax revenue over the forecasting horizon is projected to be $4.5 billion lower than had been estimated in the 2014 budget. Compared to the half-year update, nominal gross domestic product is forecast to be a cumulative $5 billion lower.
The future operating allowances were reiterated at $1 billion for 2016, rising to $2.5 billion in election year 2017, providing scope for tax cuts if conditions permit, English said. For 2018, the allowance is $1.5 billion.
Budget 2015 allocates $939 million from the Future Investment Fund – the proceeds of state asset sales – for new capital investment. Of that, the government again underwrites the struggling railway, with KiwiRail getting $210 million toward the upkeep of the national rail network.
“We imagined three or four years ago that KiwiRail would not require so much by now,” English said. “That level of government contribution is unsustainable.”
The extension of ultra-fast broadband also gets $210 million from the fund, while regional roadways and urban cycleways get $137 million and Lincoln University receives $100 million to rebuild science facilities. This year’s spending leaves the fund with about $700 million to allocate next year before the $4.7 billion of asset sale proceeds are exhausted.
Health is the biggest recipient of social services spending in Budget 2015, with an additional $1.7 billion over four years, of which the bulk, $1.3 billion, goes to district health boards.
Early childhood, primary and secondary education get an extra $680 million, while a further $305 million is allocated to other social sector initiatives, including an extra $50 million for Whanau Ora, $59 million for vulnerable children interventions, $32 million to target welfare dependency and $164 million for front-line policing and crime prevention.
Budget 2015 allocates an additional $108 million for the Christchurch rebuild, which will help fund land clearances for so-called anchor projects in the city. Business Growth Agenda funding amounts to $345 million, including $133 million allocated to higher education and $80 million to research and development grants.
The Treasury revised its forecast track for GDP, which it now sees as weaker this year and next than it projected in December, before picking up at a faster pace in 2018 and 2019. The ‘fiscal impulse’, a measure of the impact on aggregate demand in the economy from discretionary changes in the fiscal position, is seen as negative for the three years through 2019.
The forecasts are underpinned by a series of key economic assumptions, including migration inflows shrinking back to the long-run average rate of 12,000 a year by 2017 after peaking at 56,600 in the year ending June 30.
It also assumes dairy prices recover back to long-term levels forecast by the OECD-FAO by the end of 2016 of US$3,900 a metric ton, and crude oil, as measured by West Texas Intermediate, rises to US$78 a barrel by the first quarter of 2019 from US$49 a barrel in the first quarter of this year.
The Treasury sees the trade-weighted index holding at around 77.9 until late 2018, before falling back to 76.4 by the June quarter of 2019. The 90-day bank bills are seen rising 1.3 percentage points by 2019, while 10-year bond rates are expected to climb 1.9 percentage points.