BusinessNZ Update

30 May 2019

Wellbeing Budget2

Background

Budget 2019 the first of the Coalition Government’s “Well-being” Budgets was delivered against a backdrop of heightened global trade tensions with significant geopolitical uncertainty on a number of fronts. Despite moves towards greater protectionism and an escalating trade war between the US and China, demand for NZ exports is still relatively strong, with key commodities maintaining solid prices to date.

On the domestic scene, the budget was delivered with the economy showing significant signs of slowing down, with business confidence still in the doldrums.

Despite concerns at the international level and domestically, the NZ economy continues to perform reasonably well compared with many countries we traditionally compare ourselves to. Economic growth is still sound at around 2.5-3% per annum, employment is still growing – although at a slower level than previously due to fewer people available to enter the workforce. Unemployment remains at an historically low rate, and inflation is dead and buried, as evidenced by the perhaps slightly controversial decision of the Reserve Bank to reduce the Official Cash Rate (OCR) to 1.5% at its last review.

One of the key issues that stands out in the Budget is the increased spending parameters that the Government has given itself. If the economy does not continue to grow, then there will be pressure to maintain current debt levels. This could be considered a slightly risky strategy given international uncertainty at present.

The Minister of Finance stated in his speech that the Government is making significant investment necessary to meet cost pressures that have built up over the previous decade of underinvestment.

To this end “we have increased the operating allowances for new spending in this Budget to an average of $3.8 billion per year over the four-year forecast period, an increase from the $2.4 billion set at the last Budget. We have also increased the multi¬year capital allowance by $1.7 billion to $14.8 billion. ”

In essence, the “Wellbeing Budget” means measuring success in a different manner from using GDP and traditional fiscal indicators. It is very much in “addition to” traditional economic measures. It also should be noted that the whole concept of well¬being is fluid so this Budget can be considered a foundation or first-stage on which future Budgets can build.

The Budget outlined what the Government considered were the 5 priorities in respect to “Well-being”.

These included:

  • Creating opportunities for productive businesses, regions, iwi and others to transition to a sustainable and low-emissions economy;
  • Supporting a thriving nation in the digital age through innovation, social and economic opportunities;
  • Reducing child poverty and improving child wellbeing, including addressing family violence;
  • Supporting mental wellbeing for all New Zealanders, with a special focus on under 24-year-olds; and
  • Lifting Māori and Pacific incomes, skills and opportunities.

Like previous Budgets, there were a number of pre-budget announcements with a particular focus on increased funding for mental health and initiatives to address family violence.

The Budget contains a strong focus on sharing the gains of a growing economy with an emphasis on “social investment”. Many key initiatives were pre-announced in the weeks and days leading up to the Budget event itself, while dealing with pressure points in respect to key social issues such as education, health and housing.

The Government’s books are still currently in a relatively strong position with, at the same time, a greater tax take and the ability to increase expenditure and maintain debt levels. However, as previously stated, it is important for Government to maintain a reasonably tight control on expenditure as potentially large public sector pay settlements are likely to rock the boat should the economy not continue to deliver.

While there were numerous Budget announcements covering diverse areas, the following outlines in more detail those particularly relevant to business, including BusinessNZ’s thoughts and reactions, where appropriate, together with the key economic and fiscal indicators.

Overall, from a business perspective the Budget included very few new announcements that will directly affect the business community in the short to medium term.

Of those announcements (either previously announced or during the Budget) of direct relevance, we have identified the following:

Investing in the Future of Rail

More than $1b will be invested in the rail network (including $300m from the Provincial Growth Fund). This includes $375m for new wagons and locomotives, $331m to invest in track and other supporting infrastructure and $35m to replace the ferries. In addition, there is $405.5m to cover the Crown’s share of forecast cost increases to build the Auckland City Rail Link.

Bridging the Venture Capital Gap

Establishing a new $300m fund for investing in NZ’s venture capital markets through the New Zealand Venture Investment Fund (NZVIF). This will be set up to help fill the “capital gap” for New Zealand firms that expand beyond the early start-up phase. This will be aimed at mid-sized businesses that are between about $2m - $15m in size.

Additional Funding for Research and Innovation

Additional funding to the value of $157m over four years into innovation, with initiatives to support businesses to become more productive and develop high value low-emissions products. This includes $26m over four years to help support, incubate and grow start-ups.

Reform of Vocational Education

As previously indicated by the Government, $197m has been allocated to support the transition to a thriving vocational education system that better responds to learners, employers and regional needs.

Improving Incomes and Addressing the Cost of Living

One surprise is the announcement to index main benefits to wage increases. Currently, main benefits are indexed to the CPI. This will apply the same principle currently used for NZ Super. Also, there will be a lift in the abatement thresholds for main benefits to allow people to work more hours before their benefit reduces.
While we support the lifting of the abatement thresholds, there is also the real risk indexing main benefits to wage increases will reduce incentives for individuals to get back into the workforce.

Budget 2019 Economic and Fiscal Outlook

The Economic and Fiscal Outlook is still reasonably sound although some key economic indicators will drift over the forecast period, as reflected on slightly lower growth forecasts than previously.

Key Points

  • Economic activity is expected to remain modest over the forecast period averaging 2.6% out to June 2023.
  • Inflationary pressures are expected to remain relatively subdued over the forecast period averaging 2.0% per annum out to 2023 (well within the Reserve Bank’s target range of 1-3%).
  • Unemployment is expected to drift sideways over the period out to 2023 with the average unemployment rate remaining at just over 4%.
  • Core Crown tax revenue as a percentage of GDP is expected to remain relatively static at just under 29% by 2023.
  • Core Crown expenses are currently 29.1% of GDP this year and are expected to peak at 29.6% of GDP in 2021 before moderating slightly to reach 28.8% by 2023.
  • Net Core Crown debt is expected to fall slightly from 20.1% in 2019 to 18.7% in 2023. (It should be noted that the Government has adjusted the Budget responsibility rules beyond 2022 in respect to debt, giving greater flexibility to address debt based on the economic circumstances of the day. The debt target will therefore be between 15-25% after 2022 to better meet needs/pressures rather than an unduly constraining rigid debt target. There was some debate over the pre-Budget announcement on this change with some suggesting it represented a failing on the back of the Government’s promise to remain fiscally responsible, while others saw it as a sensible and pragmatic move, given NZ’s relatively low debt levels by both historical and international standards.

As stated earlier, the relatively robust figures above are heavily dependent on the economy continuing to deliver growth that will ensure the tax rates are robust to finance the Government’s ambitious expenditure programme. One could even say some of the forecasts are heroic given our own recording of how the economy is shaping up with the Performance of Manufacturing Index (PMI) and Services Index (PSI) displays slowing expansion. Given these are lead indicators that are closely linked to how GDP performs, this is a cause for concern around future sustained growth.

While the focus of the well-being budget is on meeting the needs of vulnerable New Zealanders over a range of areas (particularly mental health), it needs to be remembered that only through strong economic growth and a business sector that is willing to invest can many expenditure programmes be supported over the longer term. This requires an environment where businesses can clearly see the benefits of investing in NZ as opposed to taking their capital elsewhere. Low levels of business confidence continue to be a concern it this respect.

BusinessNZ’s Overall Thoughts

The fruits of economic growth are being shared around with many increases in expenditure to appease particular communities of voters – and the reality that NZ has a Coalition Government with varying and sometimes conflicting voter bases. The trick will be to ensure the economy keeps growing sufficiently to ensure promised funding can be delivered to critical areas in a timely way. If tax revenue falters over the period (which it may well do given still mediocre levels of business confidence), there could be some risks in delivering the proposed Budget surpluses while hoping to reduce debt. Time will tell.

 

John Pask and Steve Summers | Economists | BusinessNZ | www.businessnz.org.nz

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