Newsroom Pro's 7 things: Debt anchor dragging Labour into PPPs; Fiscal risks detailed; Rod Oram's column

In today's email we followed up the HYEFU highlights.

1. All about child poverty

Yesterday the rubber hit the road for the new Government's 100 day plan and its signature aim -- reducing child poverty.

Finance Minister Grant Robertson focused the Half Yearly Economic and Financial Update on the details of the families package replacing National's tax cut and its own families package and how it would reduce child poverty.

Whereas Bill English was able to argue in the election campaign that his families package would lift 50,000 children out of poverty in its year, Robertson said Labour's package of tax credits, heating payments and accommodation supplement upgrades would lift 71,000 out of poverty in its first year. That number would rise to 88,000 or 48 percent of those in poverty within three years.

That focus and the new Government's ability to fit its 100 day plan commitments and its coalition agreement plans into its Budget Responsibility Rules was largely welcomed. Although there were some challenges to Treasury's economic forecasts and doubts about whether there was enough headroom in future Budgets to handle chunky pay increases for workers in health, education, social development and Police.

The New Zealand Herald's Audrey Young described the HYEFU and Budget Policy Statement as a 'no surprises package with a stunning impact'.

"National thought it could offer something to everyone. Labour is targeting families with children," Young wrote.

"National is talking up the losers from Labour package of who there are many, wage earners, not all high earners, without children. But politically, there is only one loser and it is not Labour," she wrote.

"If anyone thought that the student union had taken over the Government, they have proved them wrong.

"Robertson was in his element and conducted his functions in the lock-up for the opening of the books, and in the House for a snap debate like an old pro, not someone who has been in the job for 50 days."

Fairfax's Tracy Watkins was also positive, saying it had put a stake in the ground for the new Government.

"There are winners and some losers but this is a package that delivers on Labour's promise to halve child poverty," she wrote.

"That will resonate with more than its core supporters."

Elsewhere, Fairfax's Hamish Rutherford focused on the Treasury's bullish forecasts for economic growth averaging 2.9 percent per year for the next five years, driven in part by a rebound in productivity from very weak levels.

National Finance Spokesman Steven Joyce lamented the rise in debt in the HYEFU relative to the PREFU and pointed to a tight outlook for operating spending.

"The Coalition has set up very tight operating allowances for their future spending and have left very little room for dealing with the ongoing spending pressures that any Government faces," he said.

2. Debt anchor dragging Labour to PPPs

The new Government's self-imposed debt target is limiting its ability to borrow to fix growing infrastructure deficits.

The HYEFU made clear it will be forced into fancy and expensive financing tools such as PPPs and infrastructure bonds -- something the Labour-led coalition is reflexively apposed to.

Grant Robertson has 'squared the circle' of fitting the coalition Government's big new spending plans into its self-imposed surplus and debt restrictions, but it means he will have to embrace "innovative financing mechanisms" such as Public Private Partnerships (PPPs) and off balance sheet bond issuance to fix the infrastructure deficits the Government has found.

The Finance Minister unveiled how the new Labour-New Zealand First Government's 100 day plan and its coalition agreements would affect the Budget outlook.

The Half Yearly Fiscal and Economic Update and the new Government's first Budget Policy Statement showed that it can fit its big health, education, transport and welfare spending plans within Budget responsibility rules to reduce debt to 20 percent of GDP and keep running surpluses over the economic cycle.

As it promised in the election, it is using money saved from National's cancelled tax cuts to pay for catch-up increases in health and education spending, and for a boost in the families package.

But the fit is tight, leaving little room for new pay equity deals or much wage inflation catch-ups from nurses, teachers and police officers. The capital allowances detailed in the plan also leave little room for much new spending on expensive rail or housing infrastructure, hence the need for borrow from private investors or get them to pay for the infrastructure as it is built.

The new Government is forecasting surpluses will grow to $6.5 billion by 2021, which is actually slightly above the $6.4 billion forecast before the election under the previous Government. The surplus is forecast to rise to $8.5 billion by the end of 2021/22.

Net debt is also forecast to fall under 20 percent of GDP by 2021/22. Both of those forecasts are in line with the new Government’s Budget responsibility rules to keep running surpluses over the cycle and reduce net debt to 20 percent within five years of taking office.

However, the Half Yearly Economic and Fiscal Update (HYEFU) shows the new Government has little room to deal with infrastructure deficits or unexpected lumps of new spending.

The HYEFU showed the Government had just $6.6 billion of headroom for extra operating spending over the next four years, once spending already agreed in coalition deals was included.

The capital allowances are also meagre, with just $8.9 billion of headroom over the next four years after accounting for the $1b per year Provincial Growth Fund.Elsewhere, the HYEFU revealed Treasury had slightly reduced its growth forecast for the next year, but increased it in the years beyond. It also increased its interest rate track by 25 basis points by the fourth year and reduced its unemployment rate to four percent.

'We'll need private help'

This tightness is the reason why Finance Minister Grant Robertson, in the lockup for the HYEFU, talked up the prospects of bringing in private capital to help with urban infrastructure.

Asked if the $8.9 billion of capital headroom was enough, he said: "It is the amount that we've got and we'll make it work."

"When it comes to the development of the housing and transport infrastructure, particularly in the Auckland area, we're aware that we need to be working with others to make that happen, and that will be an important part of managing the overall infrastructure and capital needs that we've got," he said.

Asked why the Government didn't just increase its net debt to GDP above the 20 percent level, he said: "It's a balance. We've said we'll take longer to pay down debt than the track that the previous Government had. But we've always got to make sure we leave ourselves a buffer for the classic rainy day and the possibility that as a small country we are more susceptible to external shocks."

"It's a balance. We think that we've struck that balance well and we'll continue to look at innovative financing mechanisms, where we consider them to be appropriate."

Earlier, Robertson said the Government had identified a number of capital pressures that had built up over a significant number of years and it was looking at ways to fund urban infrastructure in Auckland, which would include rail, roading and housing infrastructure.

"We have made it clear we are looking at a variety of funding instruments there -- infrastructure bonds, partnership with the private sector to develop the transport and housing infrastructure that is required to allow us to make that growth sustainable," he said.

"We are looking at some innovative financing mechanisms in those areas."

The Government has said it would look at law changes to allow urban development authorities and others to issue infrastructure bonds funded through targeted rates to develop water and roading infrastructure for new suburbs. It has also not ruled out PPPs on transport projects, although it has stopped or blocked such arrangements for hospitals, schools and prisons.

Other key economic and financial details from the HYEFU

Treasury slightly increased its growth forecast for the full five year period, seeing average GDP growth of 2.9 percent per year. It increased its nominal GDP forecast by $1.5 billion over the forecast period. It saw growth being slightly slower than forecast in the Pre Election Update for the second half of 2018 because of temporarily weaker business confidence and a slower housing market.

But it saw growth picking up in 2019 and 2020 as KiwiBuild and faster growth in household incomes kick in. Treasury forecast faster growth in wages than it saw before the election, but it also increased its forecast for interest rates by 25 basis points by the end of forecast period.

3. Inside the Families Package

Newsroom's National Affairs Editor Shane Cowlishaw has been following Labour's families package from opposition and has sifted through yesterday's details.

He reports Labour promised a big effort to reduce child poverty pre-election and its announcement that the package of measures will, over the next four years, almost halve the number of children living in poverty will resonate with many.

The economic setting was also the Government’s chance to relaunch its flagship Families Package, which flopped somewhat after a concerted effort from National to convince voters they would be better off with their proposed tax cuts.

Those cuts, an $8.4 billion cost that would have handed back between $10 to $20 a week to all workers and superannuitants, will be scrapped to pay for the $5.3b Families Package that will be passed under urgency.

Finance Minister Grant Robertson said 384,000 families would be better off by $75 a week under the changes, with 88,000 children expected to be lifted out of poverty by 2021.

“Our priorities are different from the previous Government. We are targeting spending at the early years to invest at the time in life where the evidence shows it makes a difference,” Robertson said.

The package is largely unchanged from what was announced before the election.
Working For Families will be boosted with the eldest child rate rising from $5303 to $5878 per year and the abatement threshold (the level after which welfare payments begin to fall) jumping to $42,700.

A planned rise to the abatement rate (the rate at which welfare payments fall as incomes rise) from 22.5 to 25 percent will be kept and the exact amount each family will receive will depend on how many children they have and their income.

The scrapped Independent Earner Tax Credit providing $10 a week to single people earning between $24,000 and $48,000 will return, while previously announced increases to the Accommodation Supplement and Accommodation Benefit will remain.

A new weekly Best Start payment of $60 will be given to all parents with a child born after 1 July, once paid parental leave has ended.

For those earning less than $79,000 a year the payments will continue until the child turned three and will replace the Parental Tax Credit for some families.

About one million beneficiaries and superannuitants will also be better off, receiving a winter energy payment that is ostensibly to pay for heating their homes but in reality can be used for anything. Couples and families will get $700 spread over winter, while single people will receive $450.

The payment will run for 13 weeks from July 2018, and in future years will start on 1 May and be payable for 22 weeks. New initiatives that were not announced pre-election include an increase by $20.31 a week to the Orphan’s Benefit, the Unsupported Child’s benefit and the Foster Care Allowance.

Not all new families will benefit

While the Best Start payments will be universal for babies born after 1 July, many families who welcome a new arrival in the next six months will miss out.
If they are eligible for Working For Families they will receive the boost there, but those outside the threshold holding a new baby will be wondering why they get nothing. Under Nation’s proposal they would have received a tax cut.

The Government will point out that its package is aimed at struggling families but it will leave some middle-income families, many of who will be shifting to a single income, with no bonus at all.

Steven Joyce, National’s finance spokesperson, was quick to point to the large portion of the population who would miss out by not receiving the tax cuts they had planned.

When it was in government National had also set a child poverty reduction target, but only projected numbers out to the first year, he said. If comparing apples with apples, then they would have lifted 100,000 children out of poverty by 2021, he said, referring to a second package that National had suggested, but not confirmed.

“It’s very strange for a Government that says it wants to increase the wages of hard-working Kiwis to start by taking more than a $1000 a year off them," Joyce said.

“National’s Family Incomes package was structured to lift 50,000 children out of poverty from April 1 next year. Labour’s 88,000 is not until 2021 by which time National would have undertaken its second similar package with a similar impact.”

Winter energy payments for both rich and poor retirees

The Government has scrapped tax cuts to direct the money to those on lower incomes, but will give the winter energy payment to superannuants regardless of their means.

Following some criticism that rich pensioners who spend their winters in sunnier locales would still bank the payment a new clause have been introduced that cancels the payments if someone spends more than four weeks overseas.

Those eligible for the payment but who feel they do not need it can also opt out, but how many are likely to do so is unknown.

Social Development Minister Carmel Sepuloni said a lot of different options had been considered, but the Government believed the effort and cost of means testing the payment was not worth it.

“I think when we weighed it up in terms of the implementation costs and everything like that this was was the best way to roll it out," Sepuloni said.

“It’s fair, it’s the easiest way to do it and we’re happy with the way we’ve done it.”

As one of the few MPs eligible for superannuation, and therefore the winter payment, Deputy Prime Minister Winston Peters was naturally asked if he would be opting out of receiving it.

He was non-committal, saying he agreed there should be no means testing before remarking that his base in the far north got chilly as well.

“I live in a very warm place called Northland. They have winter in Northland too, sometimes it goes down to zero. Not often, but it does,” he said.

4. Detailing the fiscal risks

Newsroom's Lynn Grieveson reported Treasury went through the Labour-led Government's policies with a fine tooth comb teasing out where costs will increase, and listed them as "policy change risks."

• ACC – The Government has signalled it will review the policy settings of the ACC, with Treasury saying the combined effect could potentially exceed $100 million a year, although it adds that "all of the policy issues identified entail optionality and would require either legislative or regulatory change to generate fiscal impacts and are therefore highly uncertain".

• Increased funding for New Zealand Programming and Journalism – RNZ will be transformed into a multi-platform provider, including a free-to-air non-commercial television service. There will also be a new Public Media Funding Commission. Treasury says the total costs associated with this are still being finalised, although the Government has said it will spend $38 million over 2018/19 to kick start the new public broadcasting system.

• More money for DOC – The new Government has promised a "significant increase" in funding for the Department of Conservation, although it hasn't said exactly how much.

• Fighting climate change – The Government has promised a Government-backed Green Investment Fund of $100 million, with the aim of stimulating up to $1 billion of new investment in low carbon industries.

• Fees-free tertiary study – The Government's promise to provide fees-free tertiary study, extending to three years of study from 2024, is likely to result in a "general increase in demand for tertiary education beyond the forecast period", said Treasury. It said the "behavioural assumptions and therefore the impact on future costs are unquantifiable at this early stage".

• More money for overseas aid – the Government has said it will increase the amount of funding for Official Development Assistance.

• Christchurch regeneration – the Government has committed to setting up a $300 million capital acceleration facility to develop the red zone. "Depending on how the facility is funded, there may be an impact on the Crown's fiscal position", said Treasury.

• KiwiBuild - The KiwiBuild initiative to deliver 100,000 affordable homes will require purchases of housing and land, and other costs. Housing and Urban Development Minister Phil Twyford said the latest forecast "shows an extra $5.4 billion of residential construction investment" over the next four financial years. Treasury warns that the programme is likely to increase the take up of the Homestart grant.

• Healthy Homes – The Government will make available grants towards the cost of insulation, double glazing and heating.

• State housing – The Government's commitments to reduce homelessness and improve access to public housing "is likely to have a significant fiscal impact", said Treasury.

• More refugees – Increasing the refugee quota to 1,500 over three years will incur resettlement costs and flow-on costs in health, education and welfare.

• Judicial review – the cost of promises to improve access to justice and reduce family violence is yet to be finalised, Treasury said.

• More police – the impact of the Government's promise to add 1,800 new police officers will depend on how much it is balanced by a focus on community prevention, greater use of alternative resolutions and a reduction in remand prisoners, Treasury said.

• Provincial Growth Fund – The Government has promised $1 billion per annum for regional development projects.

• Tax – With a Tax Working Group still being set up, it is impossible to know yet what impact the potential tax policy changes will have, said Treasury.

• Welfare system – Throughout the election campaign, the Government focused on the need for a fairer, more empathetic welfare system, including removing sanctions and reviewing tax and transfer settings.

• Transport – The Government says metro rail projects in Auckland and Wellington are a priority, and more investment in public transport generally as well as encouraging more cycling and walking. The costs and scope of projects are still being finalised, Treasury said.

• More money for primary healthcare – The implementation and funding details of the Government's commitments to increase funding to reduce GP fees, to train more GPs and to provide annual free health checks for the elderly are yet to be finalised.
Treasury also identified a number of "cross-portfolio" fiscal risks that are looming, including addressing the gender pay gap in the public service, "changes to the machinery of Government" (including establishing a Climate Change Commission and changing House New Zealand into a public service entity), and promised increases to the minimum wage.

Challenged by Steven Joyce in question time about the high number of increased or changed fiscal risks identified by Treasury, Robertson said it showed "what an ambitious Government" the Labour-led coalition was.

5. Rod Oram's column

Rod Oram took a close look at the Treasury's fresh forecasts to find some reassuring scenarios. But he points overseas to the risks around Donald Trump and a frothy stockmarket as factors that could turn the Goldilocks view on its head.

See his full column first published here on Newsroom Pro.

6. There were sufficient funds

Prime Minister Jacinda Ardern and Finance Minister Grant Robertson visited Treasury today to symbolically transfer $71.429 million to the New Zealand Superannuation Fund -- restarting Government contributions as promised after eight years of suspensions.

The contribution will be the first of seven over the rest of the financial year totalling $500 million, before resuming monthly contributions in 2018/19 to contribute $1.0 billion in 2018/19, $1.5 billion in 2019/20, $2.2 billion in 2020/21 and $2.5 billion in 2021/22.

7. Today's political links

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