Circuit-breaker needed if NZ wants more investors

By STEPHEN TOPLIS Strategist Deutsche Bank

Alas, this was never going to be a Budget that would satisfy business. And so it did not. It was always likely to be full of rhetoric (and, in some cases, action) directed at trying to convince those who voted Labour that they were now being rewarded for doing so. And so it did.

The Budget is not the right forum to fix the things that business is currently most concerned about. Those things include:

The implications of the Employment Relations Bill.

The propensity of the Government to change the rules at the last minute.

Fears that the leadership of the Labour Party may be being unduly influenced by its own back bench, the Alliance and the Greens.

The general concern that the Government is not listening to business.

One can debate whether these business concerns are valid. But they do exist, and the Budget could not do much to alter these concerns. Anyone thinking otherwise had been sorely misled.

You must also remember that Budgets are no longer news. Major policy initiatives are typically announced at other times and, because of the Fiscal Responsibility Act, even the fiscal process itself is usually fairly well foreshadowed.

It is, perhaps, not surprising that there was nothing in this Budget that would change business perceptions.

Looking on the bright side, there were no nasty shocks. It would be hard to claim that anything in the Budget increased business costs and there was no evidence that the Government was about to lurch into a picking winners strategy. Moreover, it is heartening to note that, despite a spend-up across a number of areas, the Government's expenditure as a percentage of GDP is fairly well contained. Therefore, one cannot contend that the Government is crowding out business any more than has been the case in recent years. Given the spend-it-all leanings of many of the current members of the Government, Michael Cullen has actually done a relatively good job in keeping overall expenditure under control.

However, significant issues remain.

There is a strong risk that the expenditure track (and hence surplus) may prove too optimistic. In particular, there must be some concern that, under the new employment regime, wage costs prove stronger than Government expectations. (Though we do concede that Treasury's growth forecasts are relatively conservative, so there is also the chance for a positive surprise.)

It is still disheartening to note that it is not Government policy to shrink its influence on the economy - even though this will have come as no surprise.

We suspect the spending that the Government has announced will have little impact. Frustrated MPs will thus push for much greater spending in the years ahead than is currently allowed for.

For those wanting handouts, promised business initiatives came to little. And what initiatives there were will apply only to small-scale operations, predominantly at their start-up phase.

Hoped-for tax breaks for research and development were quashed several days ago. The grants scheme that has replaced this will not set the world alight.

One industry that does stand to benefit from the Government's initiatives is construction, thanks to the announcement of increased capital expenditure in the education sector and further capital expenditure on state housing. However, such spending will only go a small way towards offsetting the current malaise in the sector.

The e-commerce industry will also gain a boost from increased expenditure, but the magnitude of such will fade into insignificance compared with private-sector growth.

For investors there was little in this Budget to change perceptions either. Indeed, it is likely that most will spend more time mulling the implications of a worse-than-expected current account out-turn rather than the contents of Dr Cullen's first major fiscal missive.

As far as financial markets were concerned, the Budget was soporific. Bond market participants may eventually take some heart that the tender programme is a tad lower than anticipated, and will probably be lower still once the 3G spectrum is sold. This could lend some support to equities, at the margin.

But we doubt it. And, at a pinch, one could argue that Dr Cullen's ongoing insistence that the Government will soon establish a superannuation fund may eventually lead to some support for the local bourse. Moreover, the more money that goes into such a super fund, the less there is to fritter away elsewhere.

However, any positive sentiment associated with these items will be more than offset by the fact that this Budget will tend to reaffirm to international investors that this is a Government far more interested in the redistribution of income rather than wealth generation. Moreover, Treasury's growth forecasts provide further ammunition to those who believe that growth in New Zealand is likely to fall below consensus expectations.

For there to be a sea change in the way investors view New Zealand, either some form of anti-Government circuit-breaker is needed or they need to be convinced that the economy really is on an ongoing strong growth path. This Budget will not have provided any such solace.

Budget 2000 feature

Minister's budget statement

Budget speech