NZ: Pre-election Economic and Fiscal Update - Westpac

Michael Gordon, Research Analyst at Westpac, notes that New Zealand’s government accounts are on course for growing surpluses over the next few years, though smaller than was projected in the May Budget.

Key Quotes

“The Pre-election Economic and Fiscal Update (PREFU) represents an opening of the books ahead of the general election on 23 September. The accounts reflect policy decisions that were signed off by Cabinet up to 7 August, but do not incorporate any new or upcoming policy announcements.”

“Compared to the May Budget, the fiscal accounts were substantially stronger than expected over the last year. However, this was partly offset by a less upbeat view of the economy over the next few years, leading to smaller expected surpluses in the later years.”

“The operating balance (excluding gains and losses) for the June 2017 year is now expected to reach $3.7bn, more than $2bn above the May Budget forecast. This upgrade was more or less in the bag, based on the already-released fiscal accounts for the 11 months to May, though the full-year estimate was even larger than we had assumed. Core Crown revenue and expenses are each estimated to be around $1bn better than forecast.”

“However, the operating surplus is expected to drop back to $2.9bn in the June 2018 year, and future surpluses, while rising, are smaller than were forecast in the May Budget. The Treasury has downgraded its forecasts of nominal GDP growth over the next few years – mostly on the real activity side, but with slightly softer inflation forecasts as well. That implies a smaller tax base than expected over coming years, and a higher spending requirement to some degree.”

“We felt at the time of the Budget that the Treasury’s economic forecasts were very optimistic, and we would still regard them as such even after today’s downgrades. For instance, the Treasury expects GDP growth to accelerate to 3.7% in the year to June 2019, a pace that hasn’t been reached at any point so far in this cycle. In contrast, we expect growth to slow to 2.7% by that time.”

“That said, we also noted that it’s notoriously difficult to draw the link from GDP to tax revenue and spending requirements over the economic cycle. The latest fiscal accounts show, once again, a higher than expected tax take despite lower than expected GDP over the last year. Nevertheless, we note this as a risk that the next two (non-election year) Budgets could prove to be a bit tighter if economic growth doesn’t live up to the Treasury’s expectations.”

“Net debt as a share of GDP is projected to be lower compared to the May Budget. The much larger than expected surplus last year provides a head start for the net debt position, which isn’t fully eroded by the less upbeat growth outlook in later years. The Government bond programme over the next four years was left unchanged.”