Brian Fallow

The Economics Editor of the NZ Herald

Budget 2014: Goodies on the cards

Prime Minster John Key, right, and Finance Minister Bill English have announced that there will be no election-year lolly scramble. Photo / Mark Mitchell
Prime Minster John Key, right, and Finance Minister Bill English have announced that there will be no election-year lolly scramble. Photo / Mark Mitchell

The Budget on Thursday will include a more cheerful set of economic forecasts than the Treasury delivered six months ago.

Normally that would give the Government a bit more money to spend.

But when it comes to meeting its target of a return to surplus in the coming 2014/15 year it will be offset by the fact that three-quarters of the way through the current fiscal year tax revenue is running more than $800 millon below forecast and the Treasury expects less than half of that to be clawed back by the end of the year.

Or as the acting chief government accountant Fergus Welsh put it: "Tax revenue out-turns in the current fiscal year are not expected to impact on the forecast return to [operating balance excluding gains and losses] surplus for 2014/15 as the variance against forecasts are offset by a stronger outlook for the economy than had been anticipated at the [half-year economic and fiscal update]."

The Budget announcements so far fall well short of the $1 billon the Government had already allowed itself for new spending in this year's Budget.

So despite assurances from Prime Minster John Key and Finance Minister Bill English that there will be no election-year lolly scramble, there still appears to be room for some chunky announcement on Budget day, perhaps related to housing.

Economic growth has proven significantly stronger than the Treasury expected in last December's half-year update. It expected to see gross domestic product growth of 1.7 per cent over the second half of 2013; in fact it came in at 2.1 per cent.

Its December forecasts for the next couple of years fall well short of more timely estimates from private sector forecasters. The latest GDP forecasts from the Bank of New Zealand and Westpac, for example, for the two years to March 2016 are close to the alternative scenario of stronger cyclical growth which the Treasury sketched in December.

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That scenario assumed a stronger surge in the net inflow of migrants, with the net annual gain peaking at 33,000 next September. Net immigration has already hit 31,900 in the year ended March, and shows no signs of slowing, though forecasters expect it to peak later this year.

Westpac economist Anne Boniface said the effect of a stronger GDP growth track flowing through to the tax take would be the major cause of improvement to the revenue forecasts in the outer years.

A rough estimate would be a cumulative $2 billion increase over the three years to June 2018, she said.

Higher GDP also makes it easier to meet a given target for the ratio of debt to GDP or spending to GDP. "That is going to remain a policy focus and the broad stories around that are unlikely to change, but to get a bit better."

Last year the Government cut its operating allowance (the provision for new discretionary spending and revenue initiatives) for the coming Budget and the next two to $1 billion a year. It argued that most of the forgone spending would be offset by a lower interest bill.

"I think there is possibly room for a little more spending in the outer years," Boniface said.

So far the largest new spending pledge announced is $100 million more for defence over the coming year, as part of a $500 million boost over four years.

The other announcements have been relatively small, amounting to just over $100 million altogether.

The Crown accounts released on Friday showed that although the tax revenue nine months into the year was 1.8 per cent below forecast it was still 6.3 per cent up on same period of the previous year.

- NZ Herald

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