Budget 2011: Reasons to be cheerful?
Comment by Pattrick Smellie
May 19 (BusinessDesk) – Every Budget is a guess at the future. Accordingly, every Budget requires the reader to ask: what do I need to believe?
In this year’s Budget, the biggest question marks are over growth rates, the expectation of a weakening exchange rate, and a larger-than-usual difference between the Treasury and the Inland Revenue Department forecasts for tax revenue.
If the IRD is right, the tax take in the year to March 2015 will be $1.5 billion lower than the forecasts used for the Budget, slightly more than the $1.3 billion fiscal surplus forecast for that year. On that simple analysis, Finance Minister Bill English’s “healthy, meaningful” surplus is already at risk.
Either way, it’s still tax revenue growth that largely drives the forecast return to surplus, notwithstanding all the rhetoric about fiscal restraint that has preceded this Budget.
Indeed, despite seeking savings of $1.2 billion in public sector spending over the next four years, the reality is that spending actually rises by $369 million in the current financial year before savings start to overtake new spending initiatives.
That hardly constitutes election year austerity, even if there is credible pressure placed on the core public sector. It largely reflects the fact that the KiwiSaver and Working for Families changes won’t kick in until 2012 and beyond.
Meanwhile, core Crown revenue, which is mainly the tax take, rises by roughly $5 billion a year between 2012 and 2015 to $76.4 billion, compared with $57 billion in the year to March this year.
Over the same period, core Crown expenses rise just $4.3 billion, which is certainly a credible reduction in the rate of spending growth seen over the last decade but also means the return to surplus is three-to-one based on economic recovery rather than fiscal restraint.
That makes this Budget more heavily based on that hoary old chestnut, the “growth dividend”, than the austerity package that English and Prime Minister John Key have been talking up ahead of today’s announcements.
Thankfully, expectations of a burst of growth over at least the next two years are more credible than the overly optimistic forecasts of the last two years, when disappointingly weak economic performance ensued.
As English says, the Canterbury rebuild funds “will be spent”, no matter what happens to the rest of the economy.
And even though China and India will slow down a bit in the next couple of years, their growth and growing influence on New Zealand’s economic fortunes are not about to disappear. Rather, the geo-political trend for wealth generation to shift from West to East is simply gaining momentum.
Whether the exchange rate will come to the party as much as the Treasury forecasts expect is much less certain. The forecasts see the kiwi dollar on a trade-weighted index basis will drop from a high point at present of 67.2 to 56.0 by 2015.
For it to go that low depends on continued weakness in New Zealand’s external position, with today’s forecasts showing a balance of payments deficit ballooning again to almost 7% of GDP by 2015.
Meanwhile, the primary concern for the credit rating agencies - net international liabilities at 86% of GDP today – improve only slightly in the next couple of years and are back out at 85.7% of GDP by 2015.
Having said all that, it’s a coherent Budget that builds on a consistent story, and paints a far less gloomy picture than might be expected after the string of economic and natural disasters that have battered New Zealand in the last three years.
Spending restraint is achieved through nipping and tucking on a few big programmes and is achieved with the minimum of personal pain. While government departments will struggle to find the savings they’re being required to make, they will come from a myriad of operational decisions that have yet to be made, while the process of reprioritisation fills this apparently frugal Budget with seemingly generous injections of funds for ever-popular health and education initiatives.