NZ HYEFU: Little change in the bottom-line projections - Westpac

New Zealand government’s Half-Year Fiscal and Economic Update (HYEFU) showed surprisingly little change in the bottom-line projections compared to the May Budget, despite incorporating a range of new spending initiatives from the newly-formed Government, explains the research team at Westpac.

Key Quotes

“We were particularly surprised to see very little change in the Government’s expected borrowing requirement. The Government expects to fund its extra current expenditure by lifting tax revenue, while extra capital expenditure is expected to be funded from other parts of the Government’s balance sheet rather than borrowing.”

“But in our view, the economic forecasts that underpin the fiscal projections are too optimistic. Treasury is forecasting 3.6% GDP growth in the year to June 2019, compared to our own forecast of 2.8%. If GDP growth doesn’t accelerate to the extent that the Treasury is projecting, the risk is that the Government revenue will fall short, requiring Government to either rein in some of its spending plans, find additional sources of revenue, or abandon its commitment to reducing net debt so rapidly.”

“In terms of Government policies that have been fully costed, the HYEFU includes an additional $8.4bn of operating spending over the next five years. The greatest part of the additional spending is the Families Package, which includes an increase in family tax credits, a Best Start payment for newborns, a winter energy payment, and an extension of paid parental leave. The other major spending commitment is in tertiary education, with fee-free study being phased in from next year and an increase in student allowances.”

“But this extra spending is expected to be matched by extra tax revenue stemming from the cancellation of adjustments to personal income tax thresholds which the previous Government had scheduled for next year.”

“The operating balance forecasts are slightly lower for the next few years compared to the Pre-Election Fiscal and Economic Update (PREFU) in August. However, by the June 2021 year they are expected to exceed the previous forecasts.”

“This matches the changes in the underlying economic projections. GDP growth is forecast to be a little slower in the near term, but still accelerating to a peak of 3.6% growth by June 2019. The growth forecasts for later years have been revised higher.”

“The HYEFU also includes a substantial increase in planned capital spending, totalling $41.7bn over the next five years. Some of this includes the restart of contributions to the Super Fund, as previously announced. The Kiwibuild programme has been allocated $2bn initially, as already announced, but also a further $3.4bn in later years.”

“Despite the large increase in capital spending in particular, expected bond issuance has been increased by only $1bn compared to the PREFU. This implies that the Government will pay for much of this additional spending by running down other financial assets.”

“The Government has committed to reduce net core Crown debt to 20% of GDP within five years. The HYEFU projections certainly match that commitment: net debt initially rises to 22.2% of GDP by June 2019, then falls to 19.3% of GDP by June 2022. However, that projection assumes a sharp lift in the operating surplus to $8.8bn in the final year. The PREFU projections didn’t go out as far as 2022, but Labour’s pre-election fiscal plan assumed a surplus of $6.6bn in that year. The change to the forecast appears to be due to an assumed slowdown in spending growth in 2022, although it’s difficult to tell where this slowdown occurs.”

“There was no reaction on currency markets. Government bonds rates fell 3 basis points as markets anticipated less Government bond issuance.”