Finance Minister Bill English. Photo / Mark Mitchell
The Government predicts the economy will grow by 3 per cent ($7.2 billion) from $240 billion at June 15 to reach about $247 billion at March 16. Government spending is predicted to go from around 30.5 per cent ($73 billion) to 30 per cent ($75 billion).
The Government is to be congratulated for leading the economy to a relatively strong position compared with our trading partners. It is also pleasing that it will spend a fraction of the country's growth dividend in the June 2016 year.
The Government targets its spending at about 30 per cent of GDP over the medium term which is about 4 percentage points below the OECD average. NZ's nominal GDP has significantly increased in the past decade from about $148 billion to $240 billion but the Government is spending 34 per cent of the additional $91 billion expansion (about $31 billion).
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The spending percentage is a crucial kpi: it is essentially the nation's average tax rate, since a deficit and its companion debt comprise future taxes. The Government projects a small deficit at June 2015 ($684 million), and a small surplus at June 2016 (176 million) rising to $3.6 billion to June 2019. Given the near break-even fiscal position, all the hype about the deficit is a sideshow. The trend in spending is more important.
Keynesians like Paul Krugman disagree with conservative spending in the presence of slow growth and prefer governments to step on the fiscal accelerator to increase aggregate demand. I'm glad that view is neither supported by our government, nor it would appear by the Opposition, given that it is attacking the Government for its ongoing deficit position.
Krugman is relaxed about deficit spending. I am not because the other side of government spending is tax today or tax tomorrow (when that spending is funded by a deficit).
Government spending, offset by tax, is a wash at the national level.
While NZ is in a relatively strong position, we face material risks. A stronger economy induces a stronger dollar which weakens our export receipts. Weak global commodity prices are another head wind.
Our two key export markets are China and Australia - both are under significant pressure, especially Australia. The eurozone continues to be a weak global performer without much immediate prospect of improvement. Although there is rising optimism around the US, it has a major challenge to unwind quantitative easing.
New Zealand's ageing population will make our unemployment number look better over time whereas a declining workforce is not a positive. These factors point to gathering storm clouds. The government needs to have an insurance mindset. It should target a lower fraction of government spending, which is more easily achieved when national output is rising.
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Overall this is not an exciting Budget, nor should it be. There will always be pressure to spend more, and it's important that government prioritises its spending and extracts value for money.
Although the Budget is a fiscal document, it also provides a platform for government to lead reform on a wider agenda. The biggest agenda item missing in action is reform of the Government's largest core expenditure items, such as education and health.
For example, initiatives such as Whanau Ora, which involve the private sector becoming the conduit of government services, while challenging, provides a huge opportunity to reduce costs and increase quality.
This is consistent with the Government's better public service programme.
In Australia, this initiative goes by the name of commissioning. Far better that such efficiency dividends become the source of new spending instead of being funded from growth dividends.
The Budget is relatively quiet in the realm of business and tax but implies business needs to do the heavy lifting to achieve future growth. That is a paradigm I support.
Auckland housing and monetary policy are key matters on the national economic agenda, but neither is much affected by the Budget.
• Rob McLeod is the chairman of EY.