The National-led government has delivered an “Optimist’s Budget” forecasting increased tax revenue, increased spending, and increased debt on its journey to a wafer-thin surplus by June 2015.

This was no “zero” budget. If all goes according to plan over the next three years, the Government sees its tax revenue increasing by nearly 23%, its spending rising by a little more than 7%, and its net debt growing more than 34% to generate a surplus of $197 million on a $75 billion budget in 2015.

The latest Budget is built on some heroic assumptions. Our economy will grow faster than many of our main trading partners – including Australia, the United Kingdom, the United States, Canada and Japan. Our terms of trade will remain high on the back of demand for our major export commodities. The reconstruction of Christchurch will be a key driver of growth in our domestic economy. New Zealanders will save and invest more money in productive enterprises. And the Government will realize between $5 billion and $7 billion from its partial assets sales programme. Tear into those assumptions and you’re quickly on shakey ground.

In the last three budgets, Treasury has proved to be consistently over-optimistic in its growth projections. This time, if most of our major trading partners actually do have slower growth rates than New Zealand, it’s hard to see how total demand for our major export commodities will remain high. Farmers – our major export earners – are already convinced that commodity prices have come off their peak.

A contraction in federal and state spending in Australia over the next year is expected to slow growth in our largest export market over the next couple of years. The outlook across the Tasman is for a moderate rise in unemployment and the Australians add Asia to their list of areas where demand for their exports is decelerating. As for China, our second largest export market, Bloomberg is reporting that economic growth there fell to a three-year low of 8.1 percent in the first quarter and factory output in April grew at its slowest pace since the 2008 crisis, raising the threat of job losses and possible political tensions. We do seem to be operating on a rosy view of the world.

There’s no doubt Christchurch will be a key driver of domestic growth - at some time over the next four years. The major unanswered question is: when? The Government plans on pumping $2.2 billion from its $5.5 billion Canterbury Earthquake Recovery Fund into the local economy in the next year. The insurance industry is projecting payouts of $5 billion this year and $15 billion next year. However, last Friday’s 5.2 magnitude quake could delay the rebuild, as the Finance Minister admitted on The Nation at the weekend.

A critical issue in Christchurch has been the confidence of the insurance companies,” Bill English says. “Insurance companies are preferring to be insuring people again against a backdrop of no quakes, so that they're not taking obvious risks. I think that’s yet to be seen.”

Insurance costs are already rising throughout the country as the international re-insurance industry adjusts New Zealand’s risk-rating to compensate for the massive losses resulting from the Canterbury quakes.

Whenever it finally happens, the huge surge in demand for materials and skills required for the massive repair and rebuild job in our second largest city will turn Christchurch into the epicenter of a growth explosion that will rock the rest of New Zealand by draining the country of building and construction resources.

The next vital component of the Government’s growth strategy is its partial asset sales programme. Budget 2012 is counting on funds from the sale of Mighty River Power to cover a $244 million upgrade of KiwiRail’s freight operations, $88 million worth of hospital upgrades, $76 million for an Advanced Technology Institute, and $34 million to fit out all schools with ultra-fast broadband systems. In 2013, the Government is committed under its primary sector election policy to create a Crown Water Investment Company with $400 million to invest in partnerships developing major water storage and irrigation infrastructure. Question: will each of these new investments generate as good or, preferably, a better rate of return for New Zealand than the shares of assets sold to fund them?

Finally, there’s that assumption about New Zealanders continuing to save and invest their savings in productive enterprises. The package of tax changes introduced in Budget 2012 is expected to pull another $249 million out of our pockets in the next year, rising to $589 million in 2016.

The tax package includes increases in tobacco and petrol taxes, road user charges; tighter livestock valuation rules; the elimination of tax credits for holiday homes, boats, and planes that are rented out when owners aren’t using them, and incomes under $9,880, childcare and housekeeping expenses [now superseded by Working for Families and the 20 hour free early childhood education provisions]; and – the meanest of them all – the replacement of tax credits for kids who work part-time with a limited tax exemption.

There’s certainly no sign here of any relief that would enable low income New Zealand households to grow savings and join the queue to buy shares in our energy companies or our airline.

All in all, there’s a fair amount of tax, borrow and hope in this Budget. Now, where have I heard that before?

Comments (5)

by Andre Terzaghi on May 28, 2012
Andre Terzaghi

Seems to me the rate of return on the assets the Nats are planning to sell is irrelevant, particularly given the "value" of the asset is a complete fiction dreamed up by an accountant.

What matters is the price someone is willing to pay for the asset. A prudent investor will look at the business, and will conclude the return is riskier than government debt, and will therefore only pay a price that gives a better return than buying government debt. So it's incredibly blindingly obvious that the better option is to keep the asset and it's income stream and borrow the money, no matter what you're planning to do with the money.

Unless you're counting on the "sugar rush" of the big chunk of cash coming in to utterly mislead voters in 2014.

by DeepRed on May 28, 2012

Wouldn't "Stepford Budget" be a more apt description?

by Ang on May 28, 2012

That's scary stuff about the international growth rates.  Is it actually that important that we return to surplus or are there other economic goals that we would be better focussing on?  It seems like the Govt has only that goal and then twists everything that it likes to representing surpluses and everything it doesn't like to representing deficits.

by Tim Watkin on May 28, 2012
Tim Watkin

Some forecasts have China's growth this year slipping further to below 8%. Here's one and from memory I've seen worse. Export numbers are not good as well.

Your last point's interesting David – nothing in there to boost low income households, who spend most of their money. I guess that may help savings rate in some proportional sense, but there's nothing to help low-middle income people get a head or get a house. Yet banks are offering the 90%+ mortgages again – daft.



by David Beatson on May 30, 2012
David Beatson

It'll be interesting to see if 90% mortgages turn the tide in the housing market. There's a gloomy report today from the Real Estate Institute of New Zealand dismissing the idea that we're anywhere near another housing boom - despite the evident housing shortage. House price increases since pre-crunch 2007 have not kept pace with the 15% increase in the Consumer Price Index - and total sales as a percentage of the total house stock have fallen from more than 6 percent in 2007 to 3.2% of the stock last December. Does this mean ordinary kiwis are further into austerity than their government ?

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