The Budget can be seen as the outcome of a sort of scrum.

On one side is a lot of pent-up demand to lift public spending after years of a tight fist around the fiscal reins. Lately it has seemed that ministers can't open their mouths without the word "underfunded" coming out.

That side of the scrum is reinforced by a sense that the economic cycle is in a fairly sweet spot, adding a sense of "if not now, then when?" to calls to significantly lift public spending.

The opposing pack is the Budget responsibility rules and the Government's commitment to demonstrate its credentials as a prudent steward of the public purse.


Grant Robertson's resolve in this respect may have been reinforced by the parlous state of business confidence.

Business, to generalise wildly, tends to look upon a Labour-led Government with narrowed eyes and curled lips.

The risk is that pessimism about the economic outlook becomes self-fulfilling if businesses taihoa on hiring and investing.

The Budget responsibility rules require the Government, at this stage of the economic cycle, to be running a surplus — and it is — and to keep its spending, relative to the size of the economy, below its long-run trend level — and it is.

They also require public debt to be growing slightly more slowly than nominal national output, a proxy for the tax base. It ticks that box too.

Those are the binding constraints on lifting operating spending.

But within them, this Budget has had scope to deliver a decent increase in spending.
"We are seeking to rebuild public services to the standards New Zealanders expect and deserve," Robertson said.

In the coming year, core Crown expenditure is set to rise 6.1 per cent. That follows an average of 3.1 per cent per annum over the past five years, or virtually zero when adjusted for population growth and inflation over that period.


Health is to get another $900 million or 5.1 per cent more in the coming year. That compares with an average 3.5 per cent over the past five.

Over the next four years $3.2 billion of operating spending plus another $750b for capital expenditure.

Education gets a $700m boost or 5.2 per cent, following an average 2.9 per cent over the past five years. Over four years the increase for education is $1.6b.

Looking to the out years beyond fiscal 2019, the numbers look reasonably cheerful too.

For example, the operating allowance — the pot of unallocated spending — is $2.4b for next year's Budget and subsequent ones, an increase of $500m on what had previously been pencilled in.

The accounts also benefit from an upward revision to the expected tax take by more than $1b a year over the next couple of years, reflecting confidence that the pattern three-quarters of the way through the current year, which has seen tax revenue exceed what was forecast six months ago by $1.1b, will continue.


As always, it is all predicated on the Treasury's forecasts for economic growth. It expects growth to average just over 3 per cent a year, which is in line with consensus.

But it is almost certainly wrong. The current economic expansion is already pretty long in the tooth by the standards of such things, and the chances of getting through the next three years without the economy being sideswiped by some nasty international shock are not good.

Such shocks by definition cannot be forecast. All a Government can do is ensure its balance sheet is strong enough to take the strain when one hits. That is part of the rationale for the Budget responsibility rules.

When net government debt is 21 per cent of gross domestic product or less than a third of the comparable ratio for developed countries, the balance sheet provides a bit of a bungy cord.

At this stage the Treasury expects the pace of economic growth to pick up to a peak of 3.6 per cent in calendar 2019 underpinned by strong (though slowing) population growth, low interest rates and an expanding international economy.

As for capital expenditure, the Government has stuck to its previous forecast of $42b over the next five years.


But Westpac's economists make the point that like anyone else looking to build things, the Government is liable to run up against capacity constraints in the construction sector.

Approving pots of money for this project or that is one thing; delivering them in the expected timeframe is another altogether.

And indeed, the Budget has pushed back the timing of the expected boost to residential investment generated by KiwiBuild.

The Treasury forecasts house price inflation to fall to an average of 3 per cent a year over the next four years from 7 per cent now and the double-digit rates of recent years.

Some of the other assumptions underlying its economic forecasts might raise eyebrows, like oil prices stable at US$60 a barrel and a decline in the annual net migration gain from 69,000 now to 25,000 in four years' time, although that is 10,000 more than forecast six months ago.

Forecasters keep assuming the net migration gain will revert to the mean, and it keeps not happening, though the moral of the story about the boy who cried wolf was that eventually he was right.


So which side of the scrum should win the ball of public approval? Both really. The increase in spending on health and education ought to be welcomed, at least as a down payment, by public sector unions and the bits of the public their members serve.

And business ought to be reassured that the Budget responsibility rules have been complied with.