The good, the bad and the risky
The best thing about budgets in New Zealand is they are just a little boring. Our fiscal conventions ensure big changes are telegraphed well in advance.
This year’s Budget provides more capital spending for schools and hospitals, and a families’ income package that has been long advertised.
More surprising was the substantial rise in tax revenues from stronger than expected economic growth forecast for the next several years.
Part of the reason for that is Treasury now forecasts that net migration will drop by less than previously expected. Stronger net migration means stronger economic growth, which means higher expected surpluses. All of which gives the Government about a billion dollars more to play with per year than was forecast in December – $5.3b more through 2021-22.
It will need that headroom. The envelope remains tight in part because of all of the things not in the Budget. Pay equity claims for social workers, education support staff, school support staff and others are still in play and could be well above any budgeted contingencies.
The Government is establishing a Canterbury Earthquakes Insurance Tribunal to resolve unsettled claims. But if that tribunal results in greater payments to Canterbury EQC claimants than EQC had expected in its last update, it’s hard to see any allowance for it.
And provisions for mycoplasma bovis could easily run higher than the $74m scheduled.
Another potential spanner in the revenue works – albeit an excellent one – could come through cuts in the tax collected from smokers. Tobacco excise sits at over $1.7b a year. Tobacco excise rates are scheduled to continue rising, and the total volume of tobacco sold is projected to drop by 2 per cent a year. This month saw the legalisation of vaping and other reduced-harm products. If tobacco use drops by 10 per cent a year rather than 2 per cent because people can more easily switch to alternatives, the Government will lose over $530m in annual excise revenue by 2022.
So it is good the Government is maintaining wiggle room with relatively large expected surpluses.
Also strongly to the good were two announcements that came with the Budget. James Shaw announced that the Government will start working on an independent fiscal council in August. This body will cost election promises – so we do not spend another election debating holes – and will watch compliance with fiscal responsibility rules.
And, in questions during the Budget lock-up, Grant Robertson suggested the Government is looking toward more innovative ways of financing new infrastructure for urban growth. Letting infrastructure be selffunding through levies paid by the beneficiaries of that infrastructure is key to allowing new construction and unlocking housing affordability.
So the most interesting things about the Budget are the things not really in it. There are risks buried, or not even hinted at, in the revenue and spending forecasts. There is opportunity hidden too. A larger infrastructure initiative would have been tempting but is not sustainable. And a fiscal council costing election promises will provide long-term dividends.
The Budget may have been a little boring. Watch for the interesting parts yet to come.