NZ: Budget 2017 ticked all the right boxes except savings - ANZ

Cameron Bagrie, Chief Economist at ANZ, explains that according to the NZ’s 2017 budget, a good growth picture has underpinned rosy fiscal projections and the Budget has ticked all the right boxes, though the missing is savings.

Key Quotes

“The 2017 Budget resembles an ABBA medley; I have a dream (delivering for New Zealanders); the name of the game (growth); money, money, money (rising surpluses); gimme, gimme, gimme (health primarily); and lay all your love on me (infrastructure and family income package). An SOS for savings initiatives.”

“A good growth picture underpins rosy fiscal projections. GDP growth averages over 3% (nominal 5.1%). That’s a tad optimistic given capacity pressures. The operating surplus is projected to rise to 2.2% of GDP. Net debt falls to 19.3% of GDP. The bond tender programme is unchanged for 2017/18 at $7 billion and largely maintains that level thereafter.”

“The odds of a recession between now and 2021 are non-trivial given historical experience. It’s prudent to build-up a war-chest, which the strategy caters for via a more restrictive debt target (10-15% of GDP). Treasury is projecting an uplift in the business cycle in 2018/19, which we don’t buy into, but we won’t split hairs over that.”

“Surpluses provide options to reinvest and address priority needs and still offer tax reductions. A $2 billion per year ‘family incomes package’ of adjustments to tax thresholds and increasing Working for Families is the flagbearer. Investing in a growing economy gets $1 billion, and public services $7 billion, with $3.9 billion for health. These are large numbers but are spread over four years and are what’s required just to keep the wheels turning.”

“The fiscal stance is more expansionary to the tune of 1.1% of GDP (say 0.2-0.3ppts per year), though still restrictive in aggregate. This is partially offset by underspend in 2016/17. But the positive fiscal impulse in 2018 and 2019 will be modestly relevant for the RBNZ.”

“The Budget ticks all the right boxes, though the missing is savings. It’s not absent; you see semblances of it through the growth strategy, responsible fiscal management, resuming Super Fund contributions, and little microeconomic tweaks. We say ‘missing link’ because the economy is entering a juncture where funding a domestic savings shortfall to meet our investment needs via international capital is becoming more challenging. More domestic saving is required or investment needs to fall. A more proactive stance towards saving is needed in the future or interest rates will need to move up further than would otherwise be the case to do the job.”