Budget shows disciplined approach – but only for public debt

The public debt will get bigger before it gets smaller, too: net government debt ($10 billion in 2008) now exceeds $50 billion and will hit $70 billion before the surplus is restored. 

The Budget provides for $4.4 billion of new operating spending over the next four years, but it wasn’t promoted as zero budget for nothing. The new spending is matched by mix of savings and revenue initiatives ($4.39 billion). English has pocketed $3 billion in lower-priority spending and aims to raise almost $1.4 billion in new revenue. Total net new government spending hence is just $26.5 million over those four years, to be focused on improving frontline public services and getting better results in health, education, land and order and welfare reform.    

Tax loopholes will be closed around livestock and mixed-use assets, Inland Revenue will be funded to further improve audit and compliance work, and few tax credits will be removed. Smokers will be stung (with 10 percent rise in excise each year over the next four years to raise $1.4 billion), along with people who rent out their holiday homes, boats and aircraft. 

More critically, government forecasters are counting on lifting general revenue on the back of economic growth rising from two percent this calendar year to three percent in 2014 and 2015.  That growth is expected to result in further 154,000 people getting work over the next four years (on top of 60,000 increase in employment over the past two years).

Where the Government is willing to spend is on building platform for that growth. Annual spending on science and innovation, for example, will increase by $385 million over the next four years, taking total science and innovation spending to over $1.3 billion by 2015/16, and the Government is establishing the Future Investment Fund to invest asset sale proceeds ($5-$7 billion) into schools ($33.8 million), hospitals ($88.1 million), and the KiwiRail Turnaround Plan (a further $250 million).

The creation of the Advanced Technology Institute to work with the hi-tech and manufacturing sector will account for $166 million extra in operating funds and capital.

Health has been given the biggest spending boost with $435 million to help fund cost pressures and new initiatives. But it’s the economy’s health that matters for the restoration of the budget surplus and those GDP forecasts are vulnerable to host of outside forces. The amount of tax revenue the Government collects in any year is closely linked to the economy’s performance and one percent shortfall in annual GDP growth would generate enough tax shortfalls to blow away the surplus.

Moreover, while the forecasts show the Government getting its books back into surplus in three years, they also show the current account balance burgeoning from -4.2 percent of GDP in the 2012 March year to -6.7 percent of GDP in 2014/15. So while the public debt is being brought under control under this budget plan, the country’s overseas debt will continue to burgeon. 

– By Bob Edlin, NZ Management‘s long-standing economics columnist.

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