Budget a nickel-and-dime affair

Bill English says less tax will be collected over the coming years than was previously expected. Photo / Mark Mitchell

Health and education priority with most other areas expected to ‘remain within existing baselines’.

For people other than residential property investors, Thursday's Budget is expected to be a nickel-and-dime affair of interest mainly for the extent to which it hauls back expectations for the year ahead.

The moves announced yesterday to stiffen up the rules for who falls on the taxable side of the capital/revenue boundary in respect to capital gains on residential investment property is unlikely to have a material impact on the Budget numbers.

The Treasury will have to revise down its forecast for economic growth in the year to March 2016 from the 3.4 per cent it was picking in its half-year update last December.

Private sector economists, observing the failure of export dairy prices to recover since then, are forecasting 2.8 or 2.9 per cent.

On top of that, low inflation will limit growth in nominal gross domestic product, the dollar value of the economy's output, which is a proxy for the tax base.

The Treasury now expects the Government will collect $4.5 billion less tax over the next four years than it expected in last year's Budget, Finance Minister Bill English said in a May 1 speech.

The effect will be a "slightly bigger deficit" in the 2014/15 fiscal year than the $572 million it forecast six months ago and a "slightly smaller surplus" than the previously forecast $565 million in the 2015/16 year.

But the low inflation explanation for failure to deliver the much-heralded surplus this year glosses over the fact that it affects the Government's spending as well as its revenue. It is the largest purchaser of goods and services in the country and the largest employer. Transfer payments are indexed to consumer price or wage inflation.

In addition, three-quarters of the way through the current fiscal year the tax take was 8.3 per cent higher than for the same nine months of the previous year, indicating that any blow to the Government's revenue from low inflation has yet to land. Government spending grew 3.2 per cent.

The half-year economic and fiscal outlook forecast a $2 billion, or 2.7 per cent, increase in operational spending between the current 2014/15 year and next year. If Thursday's numbers are similar that would represent a small real per capita cut in spending given official forecasts for population growth and inflation.

The fact that the ACC levy cuts announced recently don't kick in until the financial year after next implies a degree of nervousness about the coming year's surplus, which will be well within the margin of error for such forecasts.

The Government has allowed itself $1 billion for new spending in this Budget and said the priorities will be health and education (where some big pay negotiations loom) while most other areas will be expected to "remain within existing baselines".

But it has also said the Budget will contain measures to address families and children in material hardship.

In the fiscal circumstances announcements in this area are likely to emphasise the quality rather than the quantity of spending.

The 2015 Budget policy statement said: "As a first step the Government will look hard at the billions of dollars already spent on vulnerable families and children to determine whether this can be better spent."

And English devoted much of his May 1 pre-Budget speech to the benefits, both to the people concerned and the longer-term state of the Government's accounts, of the "social investment" approach of well-targeted, early and integrated interventions.

The Government has a target for reducing the number of people on a benefit to 220,000 by mid-2018, which would be 75,000 or 25 per cent fewer than in mid-2014.

Its actuaries estimate the net present value of the lifetime savings, largely from having fewer children growing up in benefit-dependent households, would be around $13 billion. How much the Government is prepared to invest for that return remains to be seen.