Editorial: Treasury expects higher growth in two years

Prime Minister Jacinda Ardern. Photo / Doug Sherring

Editorial

If this year's election campaign agreed on anything, it was that a public budget flush with funds should boost family benefits rather than reduce taxation.

National planned to do both, increasing child payments and the accommodation grant while raising the income levels at which tax rates apply.

But though these thresholds are overdue for adjustment, and rising wages have put most people in the higher brackets, there was no popular demand for the tax cut.

National instead found itself in a bidding contest with Labour on the numbers of children its benefit package next year would lift above the household poverty line (50,000, they reckoned).

That was a contest Labour was bound to win by keeping the revenue from "bracket creep" and its package presented yesterday is projected to raise 88,000 children above the statistical poverty line.

Their households will receive an average $75 a week depending on the number of children. Those with babies from July next year will receive an extra $60 a week and all beneficiaries and superannuitants will get a winter heating grant.

Altogether it will cost $5.5 billion over the next five years, much less than the $8.3 billion the Government will retain by keeping the tax thresholds as they are.

The Treasury assess the economic and fiscal consequences to be manageable. It's half-yearly update yesterday projects continued growth of just under 3 per cent a year, slightly lower next year than forecast but picking up in 2019 with higher household incomes and the Government's other big spending project, "KiwiBuild" housing, getting underway.

The Budget's operating balance is on course for a surplus of 2.5 per cent of GDP though capital spending will lead to a cash deficit over the next three years. Consequently, net Crown debt will run slightly higher than National planned and drop below 20 per cent of GDP in 2021-22.

That is the debt level considered necessary to allow the country to run deficits in a recession without undermining the dollar and causing a drop in its living standard. So those cold figures are important.

We can but hope no adverse economic event strikes the country before 2021. The Treasury considered possible risks are rising interest rates on top of high household debt, an inability to increase the construction industry's capacity to meet KiwiBuild's needs, continuing low labour productivity and the threat of trade protection in some parts of the world.

The Treasury also estimates the Government's increase in the minimum wage to $20 an hour by 2021 will slightly reduce total hours worked. Industry-wide "fair pay" agreements and pay equity settlements could reduce employment though they equally might attract more people into the labour market.

The effect will depend on how those policies are put into effect. Likewise immigration remains hard to forecast.

On top of welfare boosts and house building, the Government is introducing free tertiary education and cheaper doctors' services. Overall, the Treasury expects higher growth, slightly higher inflation and a rise in interest rates. But the economy is running strongly enough to cope.