The Minister of Finance has delivered a Budget defined by his commitment to return the Government’s books to surplus in 2014/15.
This has not been an easy task. This year he had to grapple with a decline in the growth forecasts meaning the spending allowance had to be reduced from that signalled in Budget 2011. The surplus now predicted in 2014/15 has shrunk from $1.3bn to $197m. The positive story is that he has delivered a smaller deficit in 2012/13 than previously forecast ($7.9bn against $9.7bn referenced in Budget 2011).
Budget 2012 has been tagged an ‘almost zero’ Budget. It is worth noting that this is in nominal terms so government entities have to find new ways to fund inflationary pressures.
In previous Budgets this Government set out a plan to provide $1.1bn additional spending each year. Last year the forecasts deteriorated and the Minister of Finance had to wipe out the 2011/12 planned spending growth to deliver a nominal decrease in the Budget. This year, further deterioration in the forecasts means the $800m operating allowance has reduced to $26m.
Of the last 10 quarters, nine have had positive growth and this trend is set to continue, but our growth rates are still low. Growth is forecast to steadily grow through to 2014/15 when the Christchurch rebuild is expected to peak. At this point it is expected to sit just above 3 percent and in years further out this will drop back just below three percent.
This compares to OECD forecasts of the euro zone growth of -0.1 percent in 2012 and 0.9 percent in 2013, and in the US forecast growth of 2.4 percent in 2012 and 2.6 percent in 2013 (OECD).
There is downside risk on the Budget forecasts as they were finalised on 27 April, before the most recent changes in the European outlook following the recent Greek and French elections. This week the OECD said that “the crisis in the euro zone remains the single biggest downside risk facing the global outlook”.
So what does this mean for New Zealand’s economic future? With a continuing deterioration in forecast the Government needs to convince the public it has a credible plan for growth.
The Christchurch rebuild will provide a temporary, but potentially localised stimulus, to GDP. Beyond this there is as yet little sign of a meaningful recovery in the general economy. New and reprioritised spending needs to be shown to be quality spending which will deliver results and promote economic growth. Steven Joyce’s new ‘super Ministry’ MBIE will have a lead role to play in creating optimal conditions for business investment and economic growth.
The Government still seems to retain firm public support for its ‘zero’ style Budget approach, but it will be wary of the changes in public sentiment seen across the UK and euro zone. Sustained economic growth will be required soon to convince the public that a return to higher spending levels is not a preferable economic growth strategy.
Increase in revenue
|
$ billion |
Estimated 2012/12 |
2011-12
|
Change |
|
Individual Tax |
25,840 |
24,198 |
6.79% |
|
Corporate Tax |
8,477 |
8,201 |
3.37% |
|
Other Direct Income Tax |
2,048 |
1,959 |
4.54% |
|
GST |
15,743 |
14,641 |
7.53% |
|
Other Indirect Tax |
5,555 |
5,332 |
4.18% |
|
Other fees and levies |
5,446 |
5,112 |
6.53% |
|
Total |
63,109 |
59,443 |
6.17% |
Real GDP growth – appreciable downside risk |
|
|
2011-12 |
2012-13 |
2013-14 |
2014-15 |
2015-16 |
|
GDP (Real) |
1.6 |
2.6 |
3.4 |
3.1 |
2.9 |
|
|
With increased uncertainty from the European sovereign debt crisis, macroeconomic conditions in China and the appreciation of the New Zealand dollar, there is a downside risk to the growth forecasts.
|
Growth in real GDP |
2012-13 |
|
Australia |
3.3% |
|
United States |
2.2% |
|
Canada |
2.0% |
|
United Kingdom |
0.2% |
|
Japan |
1.5% |
|
China |
8.3% |
|
|
|
Unemployment rate – trend upwards |
|
|
2011-12 |
2012-13 |
2013-14 |
2014-15 |
2015-16 |
|
Unemployment |
6.3 |
5.7 |
5.2 |
5.0 |
4.7 |
|
|
Unemployment is forecast to continue tracking down. After a peak of 6.6% unemployment is expected to drop to around 5% in the forecast period. This is partly affected by the labour shortage in Christchurch.
|
Unemployment rate |
2012-13 |
|
Australia |
5.5% |
|
United States |
8.0% |
|
Canada |
7.2% |
|
United Kingdom |
8.7% |
|
Japan |
4.3% |
|
China |
6.4% |
|
|
|
Consumer price index – within band |
|
|
2011-12 |
2012-13 |
2013-14 |
2014-15 |
2015-16 |
|
CPI |
1.6 |
2.6 |
2.5 |
2.4 |
2.4 |
|
|
Inflation has been rising recently but is expected to flatten out in the forecast period. Inflation is an increasing concern for global economies with the UK sitting at 3.2% and Australia at 3.3%. The difficulty for Bill English will be finding a way to promote growth which does not drive inflation beyond the RBNZ target range.
|
CPI |
2012-13 |
|
Australia |
3.3% |
|
United States |
2.5% |
|
Canada |
2.3% |
|
United Kingdom |
3.2% |
|
Japan |
0.1% |
|
China |
3.7% |
|
|
Gross public debt as a percentage of GDP |
|
|
2011-12 |
2012-13 |
2013-14 |
2014-15 |
2015-16 |
|
Public debt |
38.5 |
36.7 |
38.0 |
34.5 |
33.2 |
|
|
|
|
|
Gross public debt as a percentage of GDP – a key measure of fiscal sustainability – remains low by international standards, but above historical New Zealand levels. The debt levels are driving finance costs of $4.17bn, rising to $5.78bn in 2015-16.
Foreign exchange
The New Zealand dollar remains historically strong, but in the last two weeks has dropped against the pound and US dollar as the eurozone risks have worsened.
|
|
Debt as a percentage of GDP |
2012-13 |
|
Australia |
27% |
|
United States |
74% |
|
Canada |
87% |
|
United Kingdom |
91% |
|
Japan |
224% |
|
China |
16% |
|
Budget balance
Real GDP growth
