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.


© Scoop Media

Business Headlines | Sci-Tech Headlines


Tiwai Point: Rio Tinto Announces Plans To Close Tiwai Point Smelter

Rio Tinto has just announced that it will wind down New Zealand Aluminium Smelters - the Tiwai Point smelter - saying the business is no longer viable. More>>


Freight: New Report On Auckland Port Relocation

The Government has released a major new report on the options for relocating the Port of Auckland’s freight operations while deferring any decision on the issue. More>>


Chartered Accountants: COVID-19 Fails To Knock Kiwi Investor Confidence, But More Disclosure Wanted

Three months of COVID-19 lockdown and investment turmoil has done little to knock confidence in New Zealand capital markets and listed companies with overall investor sentiment very similar to 2019, an investor survey held in mid June shows. However, ... More>>


Taxation: Black-Market Tobacco Sidesteps $287 Million In Excise Tax

Year-on-year increases in consumption of illicit tobacco in New Zealand have seen illegal trade swell to 11.5% of the total market. If consumed legally, illicit products would have netted the Government $287 million in excise tax during 2019. Independent ... More>>


Energy Sector: Meridian Spilled Water To Hike Electricity Prices - Authority Ruling

The Electricity Authority has found that generator Meridian Energy manipulated the power market, costing consumers about $80 million. More>>


XE Data Update: RBNZ Official Cash Rate Decision

The RBNZ will keep the Official Cash Rate (OCR) at 0.25%. T he key points in the RBNZ statement are: RBNZ keeps the OCR unchanged at 0.25% Maintain the LSAP (large scale asset purchase) at NZD$60 billion. Committee prepared to use additional monetary ... More>>


Electricity: Kiwis Ignore Promise Of Cheaper Power

Electric Kiwi and Flick Electric Co are joint winners of Canstar Blue’s award for Most Satisfied Customers | Electricity Providers From putting on an extra layer – rather than turning on a heater – to turning off lights and choosing the energy-saving ... More>>


Electricity: Transmission Pricing For A Low Carbon Future

The Electricity Authority has decided on new guidelines for transmission pricing. James Stevenson-Wallace, Chief Executive of the Electricity Authority says the new guidelines will deliver significant benefits to consumers, through lower electricity ... More>>


RNZ: Economic Activity And Business Confidence Bouncing Back

Two surveys from ANZ show business confidence and economic activity have rebounded, but uncertainty about the future remains extreme. More>>


NIWA: The Climate Record That Keeps Getting Broken

Among the multitude of New Zealand climate statistics there is one record that continues to be broken month after month. Since January 2017 there has not been one month that recorded a below average nationwide temperature, according to NIWA’s seven station ... More>>


Govt: Extended Loan Scheme Keeps Business Afloat

Small businesses are getting greater certainty about access to finance with an extension to the interest-free cashflow loan scheme to the end of the year. The Small Business Cashflow Loan Scheme has already been extended once, to 24 July. Revenue and Small ... More>>


Science: 2019 Prime Minister’s Science Prizes Announced

The 2019 Prime Minister’s Science Prizes have been announced in a digital livestream event today. The Prizes recognise the impact of science on New Zealanders’ lives, celebrate the achievements of current scientists and encourage scientists of the ... More>>


RNZ: Fuel, Alcohol Costs To Go Up From Today

The increase today in the taxes on fuel, road user charges and alcohol is being called a tone-deaf move. More>>


Stardome Observatory: Young Kiwi Astro-Photographer Shoots For The Stars

Matariki by Josh Kirkley. The stars are aligning for up-and-coming Auckland-based astro-photographer Josh Kirkley (Kāi Tahu). During lockdown, one of his images was picked up by NASA and shared on the space agency’s Instagram to its 59.2 million ... More>>

DCANZ: Time For EU To Commit To A Level Playing Field For Trade

The Dairy Companies Association of New Zealand (DCANZ) has welcomed New Zealand Trade Minister David Parker’s statement that it is unacceptable for New Zealand exporters to continue facing an ‘unlevel playing field’ in the EU. Details leaked ... More>>


New Zealand Government: Supporting Kiwi Businesses To Resolve Rent Disputes

The Government will legislate to ensure businesses that suffered as a result of the COVID-19 response will get help to resolve disputes over commercial rent issues, Justice Minister Andrew Little announced today. More>>