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Budget 2019: Economists largely positive but sceptical about some Treasury forecasts

Friday 31st May 2019

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Economists were largely upbeat about the government's 2019 budget but say Treasury's forecasts may be too optimistic. 

The Treasury lowered its growth forecasts but still sees gross domestic product growth of 3 percent in the 12 months to June 2020 and 2.8 percent the following year.

Ramped up government spending also saw it narrow the predicted surplus over the next few years, essentially narrowing the operating balance excluding gains and losses by $9.2 billion between now and June 2023.  As a percentage of GDP, net core Crown debt continues to hover just above 20 percent until it declines to 19.9 percent in the 12 months to June 2022.

ASB Bank's senior rural economist Nathan Penny said Budget 2019 "ticks all the usual fiscal boxes" as Treasury estimates show small surpluses, while net debt tracks down below 20 percent of GDP by the end of the forecast period.  

He cautioned, however, "we see downside risks to Treasury’s economic and tax revenue forecasts" and "we suspect there may be a small risk that the government misses its net debt target, although time will tell." 

Bank of New Zealand's head of research Stephen Toplis was more downbeat. "We fear that downside risks to Treasury’s growth forecasts and upside pressure on future expenditure present the very real possibility that the government will soon return to deficits," he said. Toplis headlined his post-budget research note: 'Deficits Return in 2020'. 

S&P Global Ratings said Finance Minister Grant Robertson's budget supports New Zealand's 'AA' rating with a positive outlook. However, it also signalled "some downside risks to these projections because of rising global trade tensions, slower domestic and international growth, and weaker inflationary pressures that could weigh on the revenue outlook in the near term." 

Overall, however, the government is "on track to achieve its net debt-to-GDP target of 20 percent by fiscal 2022. New Zealand's net debt compares favorably with similarly rated peers. New Zealand's wealthy economy and strong institutional settings underpin our ratings," it said. 

ANZ senior economist Miles Workman described the forecast for a pickup in growth to just over 3 percent in the year to 2020 as "heroic", and said Treasury's forecasting "remains a little more optimistic than our own."

Overall, he said Treasury could have baked in a little more softness into their central forecasts. It sees a "very real possibility of fiscal targets being loosened in time." 

Westpac New Zealand chief economist Dominick Stephens said the economic forecasts were previously too optimistic, but now look more realistic. "However, we still think Treasury is too bullish on its government revenue forecasts. The implication is that surpluses may not be as big as forecast."

Several economists also pointed out the fact that the Treasury doesn't appear to expect another rate cut from the Reserve Bank.

"The Treasury seemed to dismiss the RBNZ’s recent cut to the official cash rate to 1.5 percent, which we think will be followed up by another cut, most likely in August," said Kiwibank chief economist Jarrod Kerr. Treasury forecasts show the 90-day bank bill rate moving gradually higher.

Others were mixed on their view of the budget. 

The Real Estate Institute of New Zealand's chief executive Bindi Norwell said it was disappointing there were no new announcements to address housing supply given "we have a deficit of around 104,000 houses across the country." 

BusinessNZ chief executive Kirk Hope said the budget's focus on innovation, research and skills would help more businesses develop at higher levels and grow the economy.

The government will divert $240 million of contributions to the New Zealand Superannuation Fund and combine it with $60 million of assets held by the Venture Investment Fund to improve access to capital for growing, mid-sized businesses that struggle for growth. The budget also contains $25.5 million of new spending over four years to assist the commercialisation of innovation.

Amy Adams, National's spokesperson for finance, called it a "botched budget".

"In 2022, there is forecast to be net debt to GDP of 19.95 percent, just $180 million within its 20 percent debt target. If the Treasury’s growth forecasts prove too optimistic - as appears likely - the government will have no choice but to cut spending, increase taxes or break its promise to New Zealanders," she said. 


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