By Alex Tarrant
Treasury’s latest set of forecasts paint a bleaker picture for the economy over the next four years than expected in May, with growth picks falling, unemployment expected to stay higher, and the exchange rate remaining stubbornly elevated.
The government will receive almost NZ$8 billion less in tax revenue over the next four years than expected in May, as expectations for all forms of tax income fall due weaker trading partner growth and a softer-than expected recovery.
But Treasury’s latest set of forecasts still pick the government keeping its political promise to hit a fiscal surplus in the 2014/15 year, with the NZ$66 million pick in today’s Half Year Fiscal Update down from the already wafer-thin NZ$197 million pick in the May Budget.
The key picks (All March years except govt surplus, which is for June years):
Growth: Annual average production GDP expected to rise from 1.6% in the year to March 2012 to 2.3% in 2012/13, 2.9% in 2013/14, 2.5% in 2014/15, 2.4% in 2015/16, and 2.4% in 2016/17.
(Compared to 2.6% in 2012/13, 3.4% in 2013/14, 3.1% in 2014/15, and 2.9% in 2015/16 forecast in the May Budget.)
Unemployment: 6.9% in March 2012/13, 6.2% in 2013/14, 5.9% in 2014/15, 5.6% in 2015/16, and 5.1% in 2016/17.
(Compared to 5.7% in 2012/13, 5.2 in 2013/14, 5.0% in 2014/15, and 4.7% in 2015/16 forecast in the May Budget)
Current account deficit as % of GDP: -5.1% in 2012/13, -4.6% in 2013/14, -5.5% in 2014/15, -6.2% in 2015/16, -6.5% in 2016/17.
(Compared to -4.6% in 2012/13, -5.9% in 2013/14, -6.3% in 2014/15, -6.7% in 2015/16 forecast in the May Budget)
Trade Weighted Index: 73.0 average in the March 2012/13 quarter, 72.8 in 2013/14, 70.6 in 2014/15, 67.3 in 2015/16, and 63.2 in 2016/17.
(Compared to 72.0 in 2012/13, 70.8 in 2013/14, 67.5 in 2014/15, and 63.0 in 2015/16 forecast in the May Budget).
Govt operating balance before gains and losses: Deficit of NZ$7.340 billion in 2012/13, deficit of NZ$2.011 billion in 2013/14, Surplus of NZ$66 million in 2014/15, Surplus of NZ$1.383 billion in 2015/16, Surplus of NZ$2.048 billion in 2016/17.
(Compared to deficit of NZ$7.897 billion in 2012/13, deficit of NZ$2.013 billion in 2013/14, Surplus of NZ$197 million in 2014/15, Surplus of NZ$2.102 billion in 2015/16.)
Tax revenue drop
All forms of forecast tax revenue fell away:
- Lower rates of ‘employee compensation’ – ie. wages – meant Source Deduction revenue would be NZ$1.8 billion lower than expected over the next four years, the HYFU numbers showed.
- Less ‘entrepreneurial income’ meant a fall in Other Persons Tax of NZ$0.9 billion.
- Company tax revenues would be driven NZ$2.1 billion lower than expected, with ‘operating surplus’ given as the driver, according to Treasury.
- The GST take was cut NZ$1.7 billion from the May forecast, due to lower consumption and residential investment forecasts, and;
- Other taxes would be NZ$0.6 billion lower than forecast
Core Crown tax revenue was expected to increase by NZ$14.5 billion over the next four years – a faster rate than economic growth – reaching NZ$71.9 billion in 2016/17, or 27.7% of GDP. Nominal GDP was forecast to grow by 24.5% over the four years.
Treasury noted NZ$1.1 billion of additional revenue would come from changes to fuel excise tax and road user charges, including in the 2016/17 year.
Lower-than-expected growth in Core Crown expenses would offset some of the lower revenue picks, but only to the tune of NZ$1.7 billion over the four years to June 2016, Treasury said.
Read the release from Finance Minister Bill English below:
The Government’s economic plan to deliver a faster-growing economy, more jobs and a return to surplus remains on track, despite ongoing uncertainty in many parts of the world, Finance Minister Bill English says.
Issuing the Half-Year Economic and Fiscal Update today, along with the Government’s Budget Policy Statement, he says Budget 2013 will focus on continuing to implement this plan.
“We’ve set four main priorities for this term. “They include returning to surplus and reducing debt; pushing ahead with a wide-ranging programme of microeconomic reforms to create a more productive and competitive economy; driving better results from public services; and supporting the rebuilding of Christchurch.
“This programme is helping New Zealanders and their families to get ahead, encouraging personal responsibility and rewarding people for hard work and enterprise.”
The Half-Year Update forecasts the Government posting a modest surplus of $66 million in 2014/15 – down from the $197 million surplus forecast in Budget 2012. It also shows net core Crown debt peaking below 30 per cent of GDP.
“Thereafter, surpluses are forecast to increase and debt is forecast to fall,” Mr English says. “Continued control over spending has allowed the Government to remain on track to surplus, despite the impact on revenue of more difficult global conditions.”
Over each of the next five years, economic growth is forecast to average 2.5 per cent, together with increasing numbers of New Zealanders in employment and a falling unemployment rate.
“The global economic environment remains uncertain and this makes it even more important to maintain clear and credible fiscal settings,” Mr English says.
“This is a time for sensible and responsible policy – not for untried economic experiments. “Budget 2013 will confirm the Government’s commitment to responsible long-term fiscal management.
“This will require restraint well beyond the surplus target of 2014/15, so we can pay down debt and build a buffer against the next global shock, while at the same time resuming payments to the New Zealand Superannuation Fund and targeting investment at priority public services.
“At the same time as getting its own finances in order, the Government is continuing to address New Zealand’s significant economic challenges, including a sustained rebalancing towards the internationally competitive sectors of the economy.
“A broad range of targeted microeconomic reforms currently underway through the Government’s Business Growth Agenda will help to lift New Zealand’s productivity and competitiveness.”
Looking ahead, the European sovereign debt crisis and ongoing fiscal debt problems in the United States are risks to the global recovery. Downgraded forecasts of global growth have been factored into the Half-Year Update.
“Compared to many other countries, the New Zealand economy is in good shape,” Mr English says. “Despite our growth forecasts being slightly weaker than in Budget 2012, New Zealand is expected to grow more strongly over the next four years than the Euro area, the United Kingdom, Japan and Canada.
“New Zealand has a number of positive opportunities over the next decade, including strong and growing trade and investment links with Asia, elevated terms of trade and the Christchurch rebuild – which is expected to contribute 0.7 per cent to annual growth over the next few years.
“We’re in a strong position to translate those opportunities into more jobs, higher incomes and better living standards for New Zealand families. “The Government’s economic and fiscal programme is aimed squarely at ensuring this happens.”
Half-Year Economic and Fiscal Update and 2013 Budget Policy Statement available at: http://www.treasury.govt.nz/
Read the release from the DMO below:
2012/13 Domestic Bond Programme Increased to $14 Billion
In conjunction with the Half Year Economic and Fiscal Update, the New Zealand Debt Management Office (NZDMO) has announced that the 2012/13 domestic bond programme will increase by $500 million to $14 billion from the $13.5 billion programme announced at Budget 2012.
Compared with the same period as Budget 2012, the domestic bond programme is forecast to rise by $6.5 billion. The inclusion of the 2016/17 year in the forecast period will add a further $7 billion to the bond programme due to pre-funding of the December 2017 bond maturity.
NZDMO will offer $200 million of nominal bonds in each of the tenders in the quarter ending 31 March 2013. The tender schedule for this quarter will be released shortly.
In the near term, Treasury bill outstandings are not expected to be reduced further from what was forecast at Budget 2012.
The NZDMO also announced that it will launch a mid-curve bond in the near future. The maturity date of the bond is likely to be April 2020. The NZDMO intends to consult with financial intermediaries on the launch of the bond shortly.
NZDMO also announced further details of its inflation-indexed bond (“IIB”) programme:
Tenders will commence on 7 February 2013 and will be held on the first Thursday of each month.
No nominal bond tenders will be held in the week that IIB tenders are held
For the remainder of the fiscal year, NZDMO will offer $200 million of the September 2025 bond in each tender.
Tenders will be offered on a multi-price basis (ie, the same basis as nominal bond tenders).
Maximum tranche size is set at $6 billion.
Over time, IIB outstandings are expected to reach 10%-20% of Government bond outstandings.
Peter Sherwin, Partner, Grant Thornton
Expect the Greens and Labour both to again call for an increase in tax and an introduction of capital gains. At a time when a steady hand is required this would be a knee-jerk reaction resulting in:
overall further weakening of growth and confidence
businesses unable to pay down further debt thereby putting their businesses into a stronger financial state
Not allowing the business cycle to complete its full turn
The Government has signalled to the major international ratings agencies that it will keep national debt below 30 per cent
As the Government approaches this threshold, greater emphasis will be put on PPP to complete major projects
Petrol tax hike
Petrol consumption in New Zealand is dropping. We either pay more tax orhave inferior roads and highways.
ASB chief economist Nick Tuffley:
The Operating Balance Before Gains and Losses (OBEGAL) is forecast to be slightly smaller over 2012/13 than the Budget forecast. However, forecast surpluses from 2014/15 onwards are smaller than previously forecast and improve at a slower pace. The Government’s aim of achieving surplus by 2014/15 remains intact on paper with a $66mn surplus forecast for that year.
Weaker economic growth forecasts have lowered revenue expectations by $7.9 billion over the 4 years to 2016. However, Treasury noted that lower inflation and interest rates have also reduced expenses (largely social assistance benefits and financing costs), providing some offset. In addition, the cost of the Emissions Trading Scheme is expected to be $0.6 billion lower than previously thought. Providing some offset to lower revenue from weaker economic growth, policy changes to fuel and excise and road user charges provide $1.1 billion of addition revenue over the projection period.
Government debts linger at a high level for longer, with net debt peaking at 29.5% of GDP in 2014/15 and 2015/16 before easing fractionally to 29.2% in 2016/17 (the dollar value of debt is still creeping up in 2016/17). In contrast, the Budget had net debt peaking at 28.7% in 2013/14 and easing to 27.7% by 2015/16 (also with the dollar value still edging up). Gross debt peaks at 38.7% of GDP in 2013/14 against 39% of GDP in the 2011/12 year just finished.
The Treasury has revised down its economic growth projections over the coming years, relative to its Budget 2012. The forecasts are slightly weaker than ours, particularly over 2015.
The downward revisions are broad-based across the sectors, with the Treasury now expecting weaker private consumption growth. The Treasury has pushed out the timing of when residential construction will pick up, such that it now expects the bulk of activity to take place over 2014 and 2015 – later than its prior expectation of 2013 and 2014 at the time of the Budget. This brings it more in line with our forecasts for residential investment, although we still see downside risks to the Treasury forecast given we expect capacity pressures in the building sector will limit the extent to which rebuild activity can ramp up. The Treasury has revised up its estimate of the total cost of the Canterbury rebuild to $30 billion. This brings it in line with the RBNZ’s updated estimate at the December MPS.
The Treasury has also revised down its forecasts for exports, though we see the risk being a stronger outcome than this. Import growth has also been revised lower, largely reflecting its expectations of weaker private consumption. To the extent we do not expect consumption growth will be as strong over the coming years, we also see downside risks to its imports forecast.
While the Treasury has revised its CPI forecast lower in line with its softer growth outlook, we see slight downside risk to its near-term inflation outlook though higher medium-term inflation.
Bond tender programme
The programme has been expanded by $6.5bn to 2015/16, with an added $4bn in 2012/13 to replace Treasury bills. Inflation-indexed bonds will be issued and expected to take 10-20% of outstanding Government bond issuance. A new bond, likely to be an April 2020 maturity, will be launched.
The forecasts still have Crown debt levels stabilising relative to GDP over the forecast horizon, albeit it with net debt peaking nearly a per cent higher than in the Budget and with less evidence of reduction kicking in. At the margin that is less attractive from a rating agency point of view. However, the economic growth forecasts look achievable (ours are slightly stronger) and imply the revenue forecasts are equally achievable, and the Government still has leeway to trim discretionary spending growth slightly (though European-style cuts to fiscal spending are self-defeating). From that context the OBEGAL forecasts in the HYEFU appear reasonable – though given the large margins of error for operating balance forecasts the $66mn surplus for 2014/15 remains microscopic.
The main implications from a financial market perspective are the expanded bond programme and greater focus on inflation-indexed bonds. For the nominal bonds there will be slightly fewer overall auctions (as no nominal bonds will be tendered when indexed bonds are) and some of the future issuance requirements will move to the indexed bonds. Long-term bond yields declined a few basis points on the release.
The Treasury’s Half-Year Economic and Fiscal Update (HYEFU) showed mild downward revisions to GDP (both the cycle and trend) versus Budget forecasts released in May, but nonetheless projects a return to surplus by 2014/15. This still looks a tad early to us but we agree with the spirit of progress.
Despite the government’s borrowing programme being revised up by $6.5bn over the forecast horizon period, increased inflation-indexed bond issuance has allowed nominal NZGS issuance to fall to $200m per tender, and for the number of nominal tenders to be reduced by one per month. We view such an outcome to be bond-friendly.
The broad tenets of the economic agenda remain in place: taking a glass half full approach, they seem to hit all the right buttons (managing government finances better, productivity and competitiveness), but this can be matched with questions on whether this is pushing the boat out far enough. Relative to global peers it looks constructive as it is articulating a growth agenda in combination with an austerity one.
Treasury is now projecting a less extreme tightening in the fiscal stance (minus 3.3 percent versus -4.6 percent at Budget time) over the coming four years. On the face of it this swings the “tight fiscal policy” versus “rebuilding a city” monetary policy pendulum towards the latter. However, something doesn’t add up: growth is lower, the fiscal stance is not as tight and yet fiscal targets remain broadly on track.
We’re puzzled though it looks like residual cash deficits are larger by the end of the forecast horizon, which carries the implication the fiscal stance will need to be restrictive for longer. So fiscal policy may end up leaning against the rebuild less up front, but for a longer period.
The Minister of Finance and the Treasury released two key documents that signal the direction the economy and Government will take over the next few years. The Budget Policy Statement (BPS) signals the Government’s strategic intentions for Budget 2013 and outlines the most important opportunities, constraints and challenges. The December Half Yearly Economic and Fiscal Update (HYEFU) lets us know how the Government finances and the economy in general are tracking.
Economic overview – Treasury revise to a much less bullish position
The Treasury have revised its economic growth forecasts downwards from an average of 3% growth per year to a 2.5% average for the next five years.
The revision is more in line with the position we took in Budget 2013. To achieve 3% average growth, we would have had to deliver an economic performance equivalent to that of the early 2000’s, where the New Zealand dollar was low and our commodity prices high.
There are certainly some stronger signs of an uplift in growth with some lift in our trading partners, and getting the ball rolling on the Christchurch rebuild. Yet, this has been offset by redundancies in the manufacturing sector, mixed commodity prices and a very high New Zealand dollar. The Treasury forecasts are much more in line with what we are seeing in the data and hearing from our clients.
The Government books – worse, and real concerns over debt
Compared to the 2012 Budget in May, the operating balance and debt forecasts have deteriorated. We find it surprising Treasury is still predicting a return to a surplus position in 2014/15, with a surplus of $66 million (down from $197 million at Budget). The Treasury are pinning its hopes on a continued reduction in Crown expense growth which it is forecasting to drop to around 30% of GDP as compared to almost 32% of GDP at Budget time.
We hold the view we took in Budget 2012 that this result is optimistic, especially given the downward revision in the economic forecasts. We feel the Treasury’s downside scenario of a return to surplus in 2016/17 is more realistic.
The net debt position is worse than what was forecast at Budget, peaking at 29.5% of GDP. What is the most concerning part of the forecasts is that net debt continues to remain around 29% of GDP, which is a significant change from Budget 2012 where it was forecast to go below 20% of GDP by 2020.
Looking ahead to the 2013 Budget – A classic “middle child”?
Year 2 Budgets are often best described as the "middle child" Budgets. Year 1 budgets are where all the tough stuff gets done, but they define the style of the Government. Year 3 budgets have all the attention and gifts. Often governments use middle Budgets to bank gains in preparation for year 3, and signal future intentions.
We see a great deal of the middle child treatment in store for 2013 with the BPS talking maintaining the Government’s plan with continued focus on previously signalled macroeconomic reform programmes, better value from public services and investments in infrastructure.
Our view remains the Government is working hard to maintain a responsible course between stimulus and austerity.
That said, our view is that running a ‘steady as she goes’ Budget for 2013 would be challenging in the current environment and we were looking for three key things from the BPS:
1. A clear signal around a work programme on retirement and the aging workforce. Budget 2012 pointed to a looming fiscal problem with superannuation and in recent months there have been growing calls, including a speech from the Secretary of the Treasury to confront the longer term issues with affordability of superannuation.
2. A coherent strategy about how the Government will manage the stalled partial asset sale programme for the remainder of the electoral term. The temptation to execute the programme in full (under a heavily compressed timeline) by the end of the parliamentary term must be huge. Yet, this could be at the expense of maximising returns from a more sequential programme, with associated impacts on net debt and infrastructure investment.
3. A more realistic assessment of the pace of the Christchurch rebuild. One of the primary reasons why the Treasury was so bullish in May was its view on the pace of the rebuild.
The BPS delivers a clearer picture on the timing of the Christchurch rebuild but remains silent on the short term management of the mixed ownership model and the long-term problem of superannuation affordability.
Overall, the BPS and HYEFU paint a more restrained, but in our view, more realistic assessment of the current fiscal and economic position. This serves to reinforce the Government’s balanced fiscal management strategy. How the Government addresses the significant revision in the net debt forecasts, the fiscal implications of an aging population and the approach to the mixed ownership model will be critical challenges in Budget 2013.