Mark Lister, 26 May 2016

The Budget was a solid affair, as we have come to expect from the Minister of Finance, Bill English. It was largely as expected, painting a more resilient economic picture that suggests we are in for robust growth, low unemployment, and steadily increasing Government surpluses, which will see net debt fall to almost 20% of GDP by 2020.

There was little market reaction, with only a small decline in market interest rates and an unchanged currency and share market. The market took more notice of the announcement from Fonterra this morning that the milk payout for the upcoming season will be $4.25. While this is above the current season ($3.90), it was a little lower than expectations and remains well below breakeven levels for many farmers.

The economic forecasts from the Treasury reflect a generally strong economy, with growth revised higher between now and 2020, and unemployment revised lower. Inflation forecasts were downgraded compared to the December 2015 half-year update, as was the path of interest rates. However, Treasury forecasts for the currency, as measured by the trade-weighted index, were increased.

More upbeat economic forecasts have boosted tax revenue projections, while lower inflation and interest rate expectations have reduced expenses. This sees the forecast surplus increase from $668m this year to $2.5bn in 2018 and $6.7bn in 2020 (up from forecasts of $1.0bn and $4.9bn respectively six months ago). This sees net debt fall much faster than previously predicted, with net debt now forecast to fall to 20.8% of GDP in 2020, after peaking at 25.6% in 2017. In December, Treasury forecasts projected net debt to fall to 24.0% by 2020. This quicker debt repayment will see contributions to the NZ Super Fund restarting in 2021, ahead of schedule.

Some economists have questioned the reliability of the Treasury growth forecasts, suggesting that the expected ramp-up in 2018 looks optimistic. The Treasury did present two alternative scenarios, one which sees weaker growth in China lead to lower terms of trade, lower inflation and higher uncertainty. This appears to be the biggest risk to the outlook, in the eyes of The Treasury. The more positive scenario sees recent economic momentum sustained, particularly the current levels of migration and house price growth.

They were no major surprise announcements on the policy front, with most of this Budget representing a “steady as she goes” approach. Unsurprisingly, the key areas to get some additional funding were health, education, law and order, as well as social security and welfare. There was a $2.2bn healthcare package, a $2.1bn public infrastructure package (much of which will go to nine new schools), as well as a $761m package for science and innovation. There wasn’t a lot on the housing front, which will likely see the Government remain under fire.