In today's email we check out the size of the kitchen sink finance minister Steven Joyce may lob at the electorate with the upcoming Budget.
1. A small kitchen sink
It's an axiom of politics that third and potentially fourth term Governments will throw the fiscal kitchen sink at the electorate with their last Budget before the election.
So yesterday's pre-Budget speech from new Finance Minister Steven Joyce gave us the first real indication of how big that kitchen sink might be.
The answer on the infrastructure spending side was not as big as it could have been.
The headline figure touted by Joyce of $11 billion in new spending over four years was not as big as it appeared at first sight, given a lot had already been announced in the December Half Year Economic and Fiscal Update (HYEFU).
The handy table above from the minister's office tells the story of how much of the spending is new, and how much was already forecast at last year's Budget and last December's HYEFU.
The net increase from December is $2 billion over four years and includes $812 million for rebuilding the Picton to Christchurch road over the next two years. The Kaikoura rebuild takes a big chunk of the net new spending announced yesterday.
The biggest increase of $2.1 billion for Budget 2017 happened between the May 2016 Budget and the December HYEFU. There was actually no increase in yesterday's announcement for Budget 2018 and just $1 billion for 2019 and 2020.
Much of the $5.4 billion increase in total over four years between last year's Budget and this year's Budget is committed to the likes of Auckland's Central Rail Link (CRL) and the Kaikoura road and rail rebuild.
Transport Minister Simon Bridges announced yesterday the Kaikoura cost was now estimated to be between $1.1 billion and $1.33 billion. While the Government has yet to announce its share of the cost of the CRL, the estimates from last year suggested it could be more than $1.6 billion.
Given the intensity of the voter concern about Auckland's infrastructure deficits in the wake of three years of record-high migration-led population growth, the increase in capital spending was relatively limited.
Joyce did not indicate whether the new operating spending allowances, which were set at $1.5 billion per year in the December HYEFU, had changed. That may be another way for the Government to increase the size of the fiscal kitchen sink to throw at the electorate, although Joyce's announcement about a new lower debt target has tied the Government's hands somewhat on that too. See more on that lower down.
2. So how will it be spent?
Joyce was coy about exactly how the extra $1.2 billion of uncommitted capital spending would be spent, asking his Wellington Chamber of Commerce audience to wait for the Budget on May 25.
He pointed to extra spending on schools and hospitals, including schools in Auckland and Christchurch's new hospital.
He later told reporters it would also help to pay for increased house building in Auckland, although he also said the Government was also looking at other private and off balance sheet vehicles to help pay for new house building.
"Some of it will," Joyce said when asked if the extra capital spending would fund new housing. "And Minister Adams will have more to say on that between now and the Budget," he said.
"We're looking at ways of financing the increasing Government housing bill from both off our balance sheet and private sector funding."
Joyce wouldn't elaborate on what those off balance sheet and private funding vehicles would look like.
"But I think one of the key things of the Government's infrastructure spend is leveraging other people to be part of it as well, and that's central Government and local Government, but also the private sector," he said.
"Because there's no cast iron rule that it has to be paid for by taxpayers."
3. 'No major fiscal loosening'
I asked Joyce if the capital announcement and the Budget more broadly would represent a loosening of fiscal policy that might force the Reserve Bank's hand on monetary policy.
"No, it won't be a dramatic loosening of fiscal policy, and in fact I think it's going to have a small fiscal impulse, which has been expected," he said.
"With the big increases in tax that we're seeing - 7.7 percent year on year - that does give us some room to do some things without being silly about it," he said.
"Certainly I don't want to see a major shift in terms of fiscal impulse," he said.
Asked if the impulse would be bigger than the one outlined in the HYEFU (0.9 percent of GDP for Budget 2017), he said: "I don't think it's going to be a massively bigger impulse in this Budget and it's definitely not what we're setting out to do."
Here's the Treasury's HYEFU chart on the fiscal impulse, with a positive figure indicating a fiscal loosening or expansion, and a negative number being a tightening. There was a loosening of around 0.5 percent of GDP between the May 2016 Budget and the HYEFU in December.
4. Tax thresholds eyed, not rates
Joyce also continued to hose down expectations of a change in the income tax rates, again pointing to threshold changes as the more likely way to deliver tax cuts, and even suggesting no cuts at all.
Joyce said the Government had not made a final decision on tax changes, but it was getting "down to the wire."
"We'd like to do something, but I've said all the way through it won't be something dramatic. I've talked about the thresholds and how some of those thresholds are a concern for me, but it's really about something we can do on Budget day, if at all."
The political risk for the Government is that any tax cut is seen as similar to the 'block of cheese' tax cut offered by then Labour Finance Minister Michael Cullen before the 2008 election.
Joyce also downplayed any talk of a change in the 28 percent corporate tax rate any time soon, despite the announcement on Wednesday night by President Donald Trump of a proposal to cut America's rate from 35 percent to 15 percent.
Joyce was wary of assuming the proposal would pass through the Congress.
5. The new debt target
The other big headline in Joyce's Budget preview was the announcement of a new medium term debt reduction target of 10-15 percent of GDP by 2025.
I've taken at more detailed look under the skin of the debt target on Newsroom Pro.
The lower debt target implies the Government is looking to further tighten its fiscal outlook, but the 10-15 percent target is actually above the latest Treasury projections that saw net debt at 8.8 percent of GDP by 2024/25.
Treasury's Fiscal Strategy Model for forecasting the Government's finances over the medium was published in December and forecast net debt would eventually fall to zero by 2027/28. It actually forecast net debt would be negative 13.5 percent of GDP by 2030/31, which would imply the Government was storing up net assets.
However, the new lower debt target will make it harder for the Government to use the fruits of higher tax revenues from economic growth to significantly reduce tax rates, increase social spending or ramp up investment in infrastructure.
The adoption of the target certainly suggests the Government is unwilling to throw the whole kitchen sink at the electorate before the election.
Joyce argued the Government needed to build a bigger buffer to deal with potential future shocks.
"We are a geologically young country, and we are also a small country in an often turbulent world, so there are plenty of a bumps ahead in the road ahead of us, whether they are natural disasters or from international events," Joyce said.
"It's important to save now for our next rainy day," he said.
"At 10 to 15 percent, New Zealand will have the capacity to absorb not just one but a couple of big shocks at once if we need to, as we had to last time."
6. Creditors aren't demanding it
The Government may think a bigger buffer is needed, but global bond markets and credit ratings agencies are not agitating for New Zealand to borrow less in either the short or long terms.
Demand for Government bonds remains very strong as ageing populations in developed and developing countries look to put their savings into less volatile assets with strong credit ratings.
Standard and Poor's and Moody's have recently reaffirmed their AA and Aaa ratings respectively and have pointed to the Government's already ample ability to respond to shocks.
"The government's efforts over many years to preserve strong public finances provides it ample room to pursue expansionary fiscal policy to buffer the economy from any potential future shocks, which could stem from another natural disaster, a housing market correction or a sharp fall in global trade," Moody's said on March 24.
"Moderate (gross) government debt levels around 30 percent of GDP give the government the capacity to implement stimulus policies, if required, to shore up economic growth," it wrote in a report affirming New Zealand's credit rating.
"Overall, we expect increasing budget surpluses to help reduce gross government debt toward 28 percent of GDP in coming years -- significantly lower than the median for Aaa-rated sovereigns. With government debt at moderate levels, New Zealand has higher fiscal flexibility than in many other high-income economies."
The average gross debt for OECD countries in calendar 2015 was 86 percent, more than double New Zealand's gross debt in that year of around 35 percent percent of GDP.
New Zealand's 10 year Government bond yield is currently just over three percent and up from a record low of 2.17 percent in August last year. But it is down from a post-Trump high of 3.4 percent in late December last year.
Joyce argued after the speech that interest rates are likely to rise, but Government bond markets are not forecasting any rapid rise in Government bond yields over the next ten years.
7. The not so lucky country...
One of the great mysteries of recent years has been the surprising turnaround in the net outflows of New Zealanders going to live in Australia.
One reason for a growing number of New Zealanders returning home and not leaving for Australia is the increasingly hostility of the Government there towards Kiwis.
Sam Sachdeva has produced an explainer on last week's changes in Australia to citizenship laws and what it means for Kiwis there.
Sam shows how it has become progressively tougher over the years for New Zealanders to be treated the same as other Australian citizens.
He also uncovers a four year hole that has opened up for Kiwis looking for access to student loans for their kids while they wait for citizenship.
No wonder so many are coming home, or not leaving here, and no wonder the net migration figures here continue to be surprisingly strong.
8. One fun thing
Foreign Minister Murray McCully’s chair isn’t even cold yet, but he’s already received a taste of what life after the Beehive may be like.
As reported by RNZ, McCully was selected for a random search at Auckland Airport en route to Washington last month to discuss combating Islamic State – diplomatic passport and VIP status notwithstanding.
McCully’s office and the Aviation Security Service, which handles aviation security here, described the blunder as a local administrative error, while the US Embassy said it had protocols to ensure senior government officials were not unnecessarily subjected to secondary screening.
McCully steps down as Foreign Minister on May 1 (replaced by Gerry Brownlee) so there may be more security tangles as a civilian on the way.