Ardern Spends in Debut Budget as N.Z. Nears Decade of Growth

(Bloomberg) -- New Zealand’s new government has maintained forecast surpluses in its first budget as the economy nears a decade-long expansion.

Prime Minister Jacinda Ardern and Finance Minister Grant Robertson made good on a raft of election promises on Thursday in Wellington, boosting spending on core social services like health, education and housing. With the economy in its ninth year of growth and projected to extend its run until at least 2022, additional tax revenues are helping them keep the books in the black.

“Our public services have been underfunded far too long and there has been a failure to appropriately plan for the future,’’ Robertson said. “That changes today.’’

Ardern led her Labour Party to an election victory late last year pledging to restore health and education services, tackle a housing crisis and improve the plight of low-income families. Thanks to the economic expansion, over the next five years the government will collect NZ$5.7 billion ($4 billion) more in tax than it projected six months ago. It will spend all of it, and then some.

While surpluses in 2018, 2019 and 2020 will be larger than forecast in December, they’ll be smaller than projected for 2021 and 2022 and borrowing is forecast to climb in nominal terms. Still, Robertson said his government has met his self-imposed budget responsibility rules which include reducing net debt to 20 percent of GDP within five years of taking office.

Kiwi Rises

New Zealand’s dollar rose more than a quarter of a U.S. cent on the budget numbers and traded at 69.18 cents at 3:53 p.m. in Wellington.

“The new government has effectively passed its first fiscal credibility test,” ASB Bank economists led by Nick Tuffley said in an emailed note. “The healthy forecasts show the government is on track to achieve its fiscal targets. In part, Treasury’s slightly generous economic and tax revenue forecasts have helped it get there.”

Key Numbers from Thursday’s Budget: 

  • The 2017-18 surplus now seen at NZ$3.14b vs NZ$2.54b
  • By 2022 the surplus will rise to NZ$7.3b, but that’s smaller than the NZ$8.8b previously expected
  • The allowance for new operational spending over the next three budgets has been set at NZ$2.4b

The government outlined new operating spending of NZ$11.4 billion over the five years to 2022, with half of that allocated to health and education. There’s a further NZ$42 billion allocated to capital spending which includes hospitals, schools and a program to build affordable homes.

The Treasury expects the government’s policies, including a higher minimum wage and increased payments to families and low-income earners, will underpin economic growth in the year ahead.

The economy will expand 3.8 percent in the year to June 2019, more than the 3.4 percent previously estimated, the new projections show.

Growth will be boosted by higher immigration than previously forecast, with net arrivals now expected to drop to 25,000 by 2022 from 68,000 now. In December, Treasury projected a drop to 15,000.

Still, the impact of the Kiwibuild home construction program, which aims to deliver 100,000 affordable homes over 10 years, won’t be as strong in the near-term as previously expected as it takes longer to implement.

Treasury’s Economic Outlook

  • Growth in 2017-18 will be 2.6% vs previous est. 3.3%
  • Growth will rise to 3.8% in 2018-19, slow to 2.3% by 2022 
  • Wage growth forecast to accelerate to 3.4% by 2022 from 1.6% in 2017
  • Inflation won’t reach 2% until 2020

Tax Windfall

The government’s spending program is underpinned by an increasing tax take, with core tax revenue rising to 28.3 percent of GDP by 2022 from 27.6 percent last year. New tax policies to target multi-nationals and property investors boost collections.

Net debt is forecast to rise to as much as NZ$67.6 billion in 2020 before declining. It was NZ$59.5 billion at June 30 last year. Debt will peak at 21.1 percent of GDP next year before dropping to 19.1 percent by 2022.

Amy Adams, finance spokesperson for the opposition National Party, said the government was borrowing more than it said it would and still failing to deliver on all its election promises.

“This is a government that has an embarrassment of riches,” she told TV3. “They are literally awash with cash, they’ve got some of the strongest economic conditions an incoming government has had in a generation, and yet they haven’t been able to meet the promises they made to New Zealand. They’re realizing they can’t afford to pay for all the things they said.”

©2018 Bloomberg L.P.

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