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NZ government to spend more as economy accelerates; English names Joyce as replacement

Thursday 8th December 2016

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The New Zealand government has earmarked an extra $2.1 billion for capital spending in its election-year budget as it benefits from a stronger forecast track of economic growth in the next few years that will swell its tax take.

The Half Year Economic and Fiscal Update lifts the Treasury’s economic growth forecasts for the next three years, with real gross domestic product now expected to grow 3.6 percent on an annual average basis in the June 2017 year, up from the 2.9 percent pace it projected in the May budget. On average, the Treasury expects growth to average 3 percent a year over the next five years.

The latest Treasury forecasts add an estimated $7.6 billion to core Crown tax revenue between 2017 and 2020, compared to its expectation back in May. At the same time, expected core Crown expenses through to 2020 have been trimmed by a total of $2.1 billion.

The net capital allowance for Budget 2017 has been increased to $3 billion from a previous $900 million, and to $2 billion per budget starting in 2018. About $1.7 billion of the 2017 allowance is yet to be allocated. The spending will include the government’s contribution to Auckland’s central rail link.

There is “a very long list of opportunities for infrastructure investments”, Finance Minister Bill English said at a briefing in Wellington. “We do need to respond to a growing economy.”

Net investments over the forecast period are $11.1 billion, at a rate of $1.9 billion to $2.8 billion a year, with the largest capital allocation, $7 billion, earmarked for the NZ Transport Agency for state highways. Capital allocations are also planned for district health boards, Crown Fibre Holdings, Southern Response and Otakaro, the HYEFU says.

English said assuming he wins the National Party caucus vote to become the next prime minister, he will name Steven Joyce as his replacement in the finance portfolio.

The Treasury says economic growth is being driven by high net migration inflows and tourist arrivals, and relatively low interest rates, which are combining to stoke residential construction, services exports, market investment and private consumption. It expects growth to moderate to a pace of 2.3 percent by 2021 in the face of dwindling spare capacity and rising interest rates.

It projects a slowdown in net migration inflows by then, which the Treasury expects will fuel wage and price pressures.

The Crown’s operating balance before gains and losses (Obegal) has been reduced by $200 million to $473 million for 2017 compared to the May budget before growing again by a combined $1.3 billion through to 2020, producing a forecast surplus of $8.5 billion in the year to June 2021.

The Treasury flags a number of factors that will partly offset the anticipated lift in the tax take, including higher social assistance expenses, the spending allowance for capital, weaker than expected ACC results, higher net finance costs and an initial estimate of $1 billion of net fiscal costs from the Kaikoura earthquakes.

The Debt Management Office has increased its 2017 domestic bond programme by $1 billion to $8 billion, with the total including $2.5 billion of inflation-indexed bonds.

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