Budget 2018 tighter than it looks

Updated

Everything is bigger at first sight in Grant Robertson’s first full budget.

The Finance Minister has forecast a bigger surplus, 1,500 more teachers, an extra $3.2 billion in health spending and 1,800 more state houses than Labour promised in the election campaign. That looks like a big spend-up.

But a second look reveals a Government that has actually stopped itself from spending significantly more on both ongoing operational spending and new capital projects. That’s despite saying it has uncovered infrastructure deficits since it was sworn in last year, and its own forecasts showing it will fail to reach its unemployment target and that it is nowhere near over-heating the economy.

The Labour-led Government’s first Budget has a close eye on its self-imposed budget restraints aimed at dragging net debt below its arbitrary target of 20 percent of GDP within five years of taking office. It has actually left itself plenty of spare room for hiccups or slowdowns, with Treasury forecasting net debt to be 19.1 percent of GDP.

A more forensic look at Budget 2018 shows it actually isn’t pumping much more stimulus into the economy than what was announced back in the ‘mini-Budget’ in December.

Treasury’s measure of fiscal stimulus to the economy shows the various changes announced in the full Budget are broadly neutral. There’s actually been a slight tightening in 2017/18, although the Government can’t be blamed for that. The weather was a factor that drove up taxation’s share of the economy.

There is a slight loosening of policy in 2018/19, but the the Government is actually still tightening policy in 2019/20 and 2021/22.

There is a cost to not pushing the economy harder. Surprisingly, given the Government has a formal policy of reducing unemployment below 4.0 percent, Budget 2018 only actually stimulates spending enough to get unemployment down to a trough of 4.1 percent. It starts rising again in 2021/22.

The numbers of people unemployed barely fall, with a fall to 117,000 forecast by mid 2019 from 125,000 now. It even starts rising again to 124,000 by 2021/22.

Robertson said in his Budget lock-up news conference the Government wanted to keep some of its powder dry to deal with the financial fallout from mycoplasma bovis, which Agriculture Minister Damien O’Connor has estimated could cost up to $1 billion.

But the Government’s response to Auckland’s population-shock-induced infrastructure and housing crisis has been limited by the 20 percent debt target and it has scrimped on a few other big capital spending items.

The Government has delayed a $1 billion decision to build a new prison at Waikeria. Instead, it will use 600 temporary shelters. It has also held off on making a multi-billion commitment to buy replacements for its 50-something-year-old Orion marine surveillance aircraft.

Budget 2018 Highlights

Grant Robertson unveiled a forecast surplus in 2018/19 of $3.6 billion, up from $3.1 billion in the just-ending 2017/18 financial year. Treasury sees the surplus rising to $7.3 billion by 2021/22, which will push net debt down to 19.1 percent of GDP. That’s well inside the Government’s key budget responsibility rule target of being below 20 percent within five years.

The Government is forecasting unemployment will bottom out at 4.1 percent in 2020 and the number of unemployed will go no lower than 117,000 in 2020. That’s barely below the 125,000 seen at the end of the current 2017/18 year and the current 4.5 percent rate.

It is forecasting inflation will take another three years to get to the 2.0 percent of the Reserve Bank’s 1-3 percent target band.

The budget looks like a big loosening of fiscal policy with big licks of new spending for teachers, DHBs and special education, but the Treasury’s figures show a broadly neutral ‘fiscal impulse’ for the economy compared with the December half yearly update. In the short term, there has actually been a tightening of fiscal policy this year as some capital spending is shifted further out. There’s also still a tightening in 2019/20 and 2021/22 “driven by declining capital spending and rising tax receipts as a percentage of GDP.”

Phil Twyford partially won his Cabinet bid to increase the number of new state house builds. Labour promised an extra 1,000 homes a year for for the first three years, but Tywford wanted Cabinet to double that. Instead, Budget 2018 delivers funding for around 1,600 per year for the next four years. There’s also an extra $142.5 million over four years for grants for low income home owners to insulate and heat their homes.

Statistics New Zealand will get a funding boost to increase the size of the Household Economic Survey to 200,000 20,000 households from 3,500 to get a better measure of child welbeing and low income.

Despite the discovery of substantial infrastructure deficits in health, education and transport since the Half Yearly Update in December, the Government will be borrowing just $1 billion extra through its borrowing programme over the next four years.

(Updated to correct 200,000 households to 20,000 households in item about Statistics NZ)