Finance Minister Grant Robertson has found an extra $24 billion to spend over the next four years by taking in more tax, reprioritising existing expenses, and thanks to delaying the previous government's debt reduction target by two years.
The biggest share of the forecast increase in operating and capital spending over the next four years – 38 percent – comes from what Robertson calls “a responsible debt reduction track” announced as part of the government's election policy platform last year.
By adding two years to the time it will take to shrink core Crown debt to 20 percent of gross domestic product, he finds $9 billion that the previous government didn’t have. A further 33 percent of the new spending, or $7.9 billion, comes from the already announced reversal of National’s tax cuts.
He found another $1.5 billion from a combination of tax tweaks - a crackdown on tax dodgers, new property taxes, GST on low value imported goods - and from reprioritisation – some $700 million of savings from existing departmental budgets.
The strength of the New Zealand economy does the rest. While the Treasury has lowered its forecasts for GDP growth in the 2018 and 2019 June years, compared to the Half Year Economic and Fiscal Update (Hyefu) in December, growth comes bouncing back from 2020 through 2022.
The result is $5.3 billion more in tax revenue than was projected under National in last year’s Pre-Election and Fiscal Update. All up, Robertson has found $18 billion in extra operating spending and $6 billion in capital spending than National was projecting.
“Responsible management of the government finances and a strong economy have given us room to increase the operating and capital allowances at Budget 2018 and continue to meet the Budget responsibility rules,” Robertson said.
Over the next five years, the government expects to lift core Crown tax revenue by $23.4 billion, with the biggest increases coming from source deductions and GST. The Treasury says economic growth will be driven by “a solid international outlook, high terms of trade, increased government spending, and growth in domestic economic activity.”
Compared with the Hyefu in December, the Treasury now projects $46 billion more in nominal GDP, although all but $6 billion of that reflects technical revisions to the GDP starting point, reducing the actual gain to $6 billion.
Net core Crown debt remains little changed over the next four years before reducing to 19.1 percent of GDP in 2022.
Core Crown expenses are $6.1 billion higher over the next five years than was projected in the Hyefu but taken alongside the improved track for revenue, the net increase in the operating budget before gains and losses (obegal) is just $400 million compared to the forecast in December.
Despite the reliance on increased revenue, Budget 2018 had little in the way of new tax initiatives.
That’s because tax reform is on its own track. The Tax Working Group, with a mandate to look at the structure, fairness and balance of the tax system, expects to produce draft recommendations toward the end of the year with any major new policy to be taken to the electorate at the general election scheduled for 2020. There are currently papers out for submissions on R&D tax credits, GST on imported goods and loss ring-fencing for rental properties, as well as work to update the Tax Administration Act.