The National-led government has delivered an “Optimist’s Budget” forecasting increased tax revenue, increased spending, and increased debt on its journey to a wafer-thin surplus by June 2015.
This was no “zero” budget. If all goes according to plan over the next three years, the Government sees its tax revenue increasing by nearly 23%, its spending rising by a little more than 7%, and its net debt growing more than 34% to generate a surplus of $197 million on a $75 billion budget in 2015.
The latest Budget is built on some heroic assumptions. Our economy will grow faster than many of our main trading partners – including Australia, the United Kingdom, the United States, Canada and Japan. Our terms of trade will remain high on the back of demand for our major export commodities. The reconstruction of Christchurch will be a key driver of growth in our domestic economy. New Zealanders will save and invest more money in productive enterprises. And the Government will realize between $5 billion and $7 billion from its partial assets sales programme. Tear into those assumptions and you’re quickly on shakey ground.
In the last three budgets, Treasury has proved to be consistently over-optimistic in its growth projections. This time, if most of our major trading partners actually do have slower growth rates than New Zealand, it’s hard to see how total demand for our major export commodities will remain high. Farmers – our major export earners – are already convinced that commodity prices have come off their peak.
A contraction in federal and state spending in Australia over the next year is expected to slow growth in our largest export market over the next couple of years. The outlook across the Tasman is for a moderate rise in unemployment and the Australians add Asia to their list of areas where demand for their exports is decelerating. As for China, our second largest export market, Bloomberg is reporting that economic growth there fell to a three-year low of 8.1 percent in the first quarter and factory output in April grew at its slowest pace since the 2008 crisis, raising the threat of job losses and possible political tensions. We do seem to be operating on a rosy view of the world.
There’s no doubt Christchurch will be a key driver of domestic growth - at some time over the next four years. The major unanswered question is: when? The Government plans on pumping $2.2 billion from its $5.5 billion Canterbury Earthquake Recovery Fund into the local economy in the next year. The insurance industry is projecting payouts of $5 billion this year and $15 billion next year. However, last Friday’s 5.2 magnitude quake could delay the rebuild, as the Finance Minister admitted on The Nation at the weekend.
“A critical issue in Christchurch has been the confidence of the insurance companies,” Bill English says. “Insurance companies are preferring to be insuring people again against a backdrop of no quakes, so that they're not taking obvious risks. I think that’s yet to be seen.”
Insurance costs are already rising throughout the country as the international re-insurance industry adjusts New Zealand’s risk-rating to compensate for the massive losses resulting from the Canterbury quakes.
Whenever it finally happens, the huge surge in demand for materials and skills required for the massive repair and rebuild job in our second largest city will turn Christchurch into the epicenter of a growth explosion that will rock the rest of New Zealand by draining the country of building and construction resources.
The next vital component of the Government’s growth strategy is its partial asset sales programme. Budget 2012 is counting on funds from the sale of Mighty River Power to cover a $244 million upgrade of KiwiRail’s freight operations, $88 million worth of hospital upgrades, $76 million for an Advanced Technology Institute, and $34 million to fit out all schools with ultra-fast broadband systems. In 2013, the Government is committed under its primary sector election policy to create a Crown Water Investment Company with $400 million to invest in partnerships developing major water storage and irrigation infrastructure. Question: will each of these new investments generate as good or, preferably, a better rate of return for New Zealand than the shares of assets sold to fund them?
Finally, there’s that assumption about New Zealanders continuing to save and invest their savings in productive enterprises. The package of tax changes introduced in Budget 2012 is expected to pull another $249 million out of our pockets in the next year, rising to $589 million in 2016.
The tax package includes increases in tobacco and petrol taxes, road user charges; tighter livestock valuation rules; the elimination of tax credits for holiday homes, boats, and planes that are rented out when owners aren’t using them, and incomes under $9,880, childcare and housekeeping expenses [now superseded by Working for Families and the 20 hour free early childhood education provisions]; and – the meanest of them all – the replacement of tax credits for kids who work part-time with a limited tax exemption.
There’s certainly no sign here of any relief that would enable low income New Zealand households to grow savings and join the queue to buy shares in our energy companies or our airline.
All in all, there’s a fair amount of tax, borrow and hope in this Budget. Now, where have I heard that before?