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Fitch Ratings says government's Budget is encouraging; Labour labels it a ‘blackjack’ Budget

Fitch Ratings says government's Budget is encouraging; Labour labels it a ‘blackjack’ Budget

Here's a look at responses to the Budget, including from international credit ratings agencies and opposition political parties.

In the first response from a credit rating agency Fitch left New Zealand’s foreign-and local currency ratings unchanged at ‘AA’ and ‘AA+’ respectively. The outlooks on both ratings remain stable. Standard & Poor's followed, saying New Zealand's credit metrics remained consistent with its 'AA' foreign currency rating.

Meanwhile Moody's Investors Service said although the Budget doesn't change its view of New Zealand's creditworthiness, it again highlights the country's main vulnerability of reliance on foreign savings to fund investment.

"On this front, the budget’s assumptions contain no improvement, with the current account deficit gradually rising over the coming few years to more than 6% of GDP by 2016-17. This trend, if realized, would mean that New Zealand will remain dependent on access to international capital markets during a period when those markets face some uncertainties, particularly related to European sovereign debt," says Moodys.

Here's Art Woo, Fitch director of sovereigns and primary analyst for New Zealand

• Fitch views today’s New Zealand budget announcement as encouraging as it continues to demonstrate the government’s commitment to fiscal consolidation. In particular, the government has stuck with its previous goal to bring the budget back to surplus in the fiscal year 2015 (end-June 2015).

• In addition, it was also positive to see that the fiscal year 2013 budget deficit came in at 2.9% of GDP on account of improving tax revenues, which is below the expectation of 3.4% of GDP that was set out in the half-year update announced back in December 2012.

• Similarly, the government indicated that net core Crown debt was expected to peak at 28.7% of GDP in fiscal year 2015, which is also below an expected peak of 29.5% of GDP in fiscal year 2015 set out in the most recent half-year update.

• Today’s budget announcement does not alter New Zealand’s current sovereign ratings. New Zealand’s Long-Term Foreign-and Local Currency Issuer Default Ratings stand ‘AA’ and ‘AA+’ respectively. The outlooks on both ratings are Stable.

Here's Standard & Poor's

The New Zealand government's proposed 2014 budget will have no immediate effect on the ratings and outlook on New Zealand (Crown; foreign currency rating AA/Stable/A-1+; local currency rating AA+/Stable/A-1+).

The Crown's latest budget projections are broadly in line with our expectations. The government’s headline budget result--the operating balance before gains and losses (OBEGAL)--is a little higher, on average, over fiscal years 2013 to 2017 than previously projected. The OBEGAL is forecast to be in a small surplus position in fiscal 2015, with rising surpluses in future years.

The surplus is slightly smaller in fiscal 2016 than previously expected, though, mainly because of policy decisions. The government's fiscal balance is a little improved relative to its previous forecast, with smaller deficits expected each year to fiscal 2017 than earlier anticipated.

As a result, the projected peak in the Crown's net debt as a share of GDP is slightly lower than previously forecast.

Expected costs associated with the Christchurch post-earthquake reconstruction have risen, but these costs have been absorbed.

Overall, New Zealand's credit metrics remain consistent with the 'AA' foreign currency rating. We continue to expect the government to remain committed to its medium-term fiscal strategy of targeting operating surpluses and limiting the central government's net debt to 30% of GDP (and limiting net debt to 20% of GDP by 2020).

We believe New Zealand's strong political and community consensus for prudent fiscal management will support this fiscal strategy.

And here's Steven Hess, Moody's senior vice president

The 2013 budget demonstrates that the New Zealand government continues to move in the direction of budget balance after the period of large deficits precipitated by the global financial crisis and the Christchurch earthquakes. This deficit trajectory is not very different from that which the government has previously projected and remains supportive of the stable outlook on Moody’s Aaa government bond rating.

Higher tax receipts and a somewhat smaller operating deficit in the current fiscal year, ending June 30, are positive developments but do not fundamentally change the path toward fiscal balance that the government has laid out.

However, the projected surplus in 2014-15 is smaller than earlier projected by the government, partly due to a reduction in ACC levies. Thus, should there be further negative developments, the achievement of a surplus in that year could be jeopardized.

Furthermore, a delay in recommencing contributions to the Superfund exacerbates long-term fiscal pressures. As a result, while the projections laid out for the coming few years are positive, long-term challenges remain.

According to the budget document, net debt as a proportion of GDP will now peak at about 29% of GDP in 2014-15 before beginning to decline, while gross debt will reach a peak of about 39%. Although these levels are considerably higher than New Zealand’s recent historical experience, they remain below the median for sovereigns rated Aaa by Moody’s.

For gross debt, that median is currently about 50%, with Australia being lower than New Zealand but most large countries, including the US and Germany, being substantially higher.

The economic projections behind the budget seem reasonable in terms of real growth of 2-3% in the coming couple of years.

New Zealand’s main vulnerability continues to lie in the reliance on external saving to fund its investment. On this front, the budget’s assumptions contain no improvement, with the current account deficit gradually rising over the coming few years to more than 6% of GDP by 2016-17. This trend, if realized, would mean that New Zealand will remain dependent on access to international capital markets during a period when those markets face some uncertainties, particularly related to European sovereign debt.

Nonetheless, to date, New Zealand’s access remains solid, as demonstrated by the relatively strong exchange rate.

Bottom line: The budget is in line with expectations as to the path toward balance. Thus, it does not change our view of the country’s creditworthiness.

Here's the initial response from Labour Party leader David Shearer

National has delivered a ‘blackjack’ Budget that stacks the deck against the millions of New Zealanders who work their guts out every day trying to get ahead, says Labour Leader David Shearer.

“For the fifth year in a row, this Government has forgotten the millions of hard-working Kiwis who are the backbone of this country and the engine of our economy. Budget after Budget, this Government has promised a brighter future. But year after year, they let New Zealanders down.

“This is a Government for the well-heeled and the well-connected. One that puts vested interests above the interests of all New Zealanders.

“Once again, National is relying on flogging off our assets to solve our economic problems. But the Budget shows that in fact by 2017, the country will be at least $49 million worse off every year. And that doesn’t take into account the costs of selling our power companies.

“They ramped up expectations this year. They claimed there’d be relief for first-home buyers and that they’d tackle the affordable housing crisis. But all they’re doing is repeating their hollow promise to get tough on councils over resource consents.

“It’s time to get real. Only Labour’s plan to get stuck in and build 100,000 affordable houses for Kiwis will make a real difference.

“National also fed media speculation that it would help the 21 per cent of our kids living in poverty under their watch. But all it’s doing is exploring ideas and piloting programmes. That won’t feed the kids who are going to school hungry today.

“New Zealanders face a bleak future under National. They’ve had five deficits in a row and now they’re predicting they’ll just squeak into surplus in 2014/15. And they’ll only get there by overcharging for ACC and taxes on petrol. Unemployment will stay above 5 per cent. Growth will sit on an average of just 2.5 per cent a year for the next five years.

“This is the ‘looking but not touching’ Budget. This is the Budget that proves National has given up. There are lots of trials, lots of looking at ideas and claims of building momentum sometime in the distant future.

“There’s nothing that will change the lives of hard-working New Zealanders who are losing hope. Only a Labour Government has the courage to make the big changes needed to make the economy work for all Kiwis,” said David Shearer.

And here's Greens co-leader Russel Norman

National’s self-proclaimed ‘Building Momentum’ Budget is looking more like an out of control debt train wreck with the country’s overseas net debt topping $200 billion by 2017 and the current account deficit topping $17 billion a year, the Green Party said today.

Both the Reserve Bank Governor and the IMF have signalled early warning signs of an economy that has not rebalanced successfully towards savings, investment, and export-led growth. Budget 2013 confirms that direction.

“Budget 2013 does nothing to address the fundamental imbalances emerging in our economy meaning this recovery will be neither jobs-rich nor sustainable,” said Green Party Co-leader Dr Russel Norman.

“The National Government has failed to rebalance our economy as promised.

“Bill English made rebalancing the economy his primary goal in earlier budgets. In Budget 2013, he failed to mention it once.

“The current account deficit is the key economic measure of the success or failure of the broader economy. Treasury now forecasts the deficit to rise to 6.5 percent in 2017 making our deficit the second worst in the developed world.

“This is a debt time bomb that a return to Government surplus alone will not address.”

Dr Norman highlighted emerging imbalances in the housing sector as the most dangerous for the economy.

“National’s new housing policy is too little too late, and will serve the interests of property developers more than it will help first home buyers and those looking for a house to call home in Auckland,” Dr Norman said.

“It comes long after the Greens have announced practical solutions, like Home for Life and a tax on capital gains (excluding the family home), to address an anticipated housing shortage and housing affordability crisis.

“National’s on-going failure to institute a capital gains tax means they’re still to close the single largest remaining loophole in our income tax system.

“Selling assets, massively increasing debt, a new housing bubble, and the earthquake rebuild might keep the train on the track until the election, but it will lead to major problems further down the track. It is an out of control train wreck of debt that future New Zealanders will one day have to pick up the bill for.”

Here's the Council of Trade Unions

"Today's Budget fails to address the huge social problems of a crisis in jobs, low wages, increasing poverty and inequality that New Zealand currently faces. These problems have grown over the last five years, and this Budget doesn’t do enough to help solve them." says Bill Rosenberg, CTU Economist.

"The Budget should have been about more assistance for people who lose their jobs, productive community work programmes, and a strategy to help manufacturing and other higher value, higher wage industries grow.”

“There is nothing new in this Budget to address New Zealand’s high unemployment rate – higher than many other OECD countries doing worse economically – with unemployment forecast to still be at 6 percent next year, and significantly worse than the forecast in last year’s Budget which proved to be much too low.”

“A small package for tourism, science and technology and marketing for international students goes nowhere near what is required, especially at a time when more beneficiaries are being forced into jobs and the government’s taxation and expenditure policies are going to reduce growth in the economy by about 1 percent per year in the next four years. We continue to be very dependent on the Christchurch rebuild and commodity prices for the next few years.”

“The response to the problem of child poverty is hugely disappointing. Child poverty, as highlighted by the Children’s Commissioner and many others, is a reflection of the high inequalities in New Zealand and requires a strong positive response that includes addressing our low wage structure. A weak repackaging of other initiatives – home insulation targeted at low income families, programmes to reduce rheumatic fever, more for budget advisory services, investigation of low interest loans, and a trial of housing warrants of fitness for housing corporation houses – may be useful but barely scratch the surface of what needs to be done.”

“If the government is serious that things are now coming right, it should have used the opportunity to address these serious social issues. It has failed to do so.”

Here's Deloitte

Government spending an essential catalyst to attracting and retaining private sector investment

Overall the Government is doing a world-class job of an extremely complex and costly disaster recovery process, according to Deloitte’s Christchurch Managing Partner Brett Chambers.

“Today’s announcement of a further $2.1 billion of operating and capital spending for the Christchurch rebuild, bringing Government’s total spend to $15.2 billion, will benefit not only the people of Christchurch, but the whole of New Zealand, as the country depends on the full economic contribution from its second largest city,” says Mr Chambers.

The rebuild of Christchurch represents both an opportunity to prime the pump of private sector investment and a chance to focus the Government’s share of the rebuild cost on projects that will provide a long term economic boost. Government spending is an essential catalyst to retaining and attracting private sector investment, and once key projects in the central city get under way, private commitment will follow.

Projects like the $1 billion commitment to rebuilding schools, the $600 million rebuild of the city’s hospitals and the recently announced $100 million Lincoln Innovation Hub are all part of a process that will provide economic stimulus for the next 5 to 10 years during their construction, and for many decades to come as they deliver improvements to education, health, science and innovation.

But Mr Chambers cautions that the progress on the recently revised $40 billion spend has been mixed. Insufficient progress has been made on the resolution of insurance claims over the $100,000 EQC cap, and the building of the 12,000 to 15,000 new homes needed in the region.

“The Government needs to continue to be impatient and demand faster progress on all fronts if we are to fully realise the economic return on the Crown’s investment that Cantabrians and the rest of New Zealand have been sold,” concludes Mr Chambers.

Here's the Employers and Manufacturers Association

Budget good for business confidence

Returning the government books to surplus in 2014/15 gives business a lot of confidence, said Kim Campbell, chief executive of the Employers and Manufacturers Association.

"This budget is a good one for keeping the emphasis on financial stability while helping the economy edge forward," he said. "Three per cent GDP growth with inflation about one per cent is a meaningful achievement.

"The Minister of Finance is to be congratulated.

"Employers will be delighted with the news that ACC levies are to come down.

"The intense focus being brought to bear on making housing more available and more affordable cannot come soon enough.

"The extra investment going into skills and employment carry the right messages. "Though the increased investment in research and science is pleasing will still not be enough to bring us up to OECD measures.

"On the downside there are no initiatives to spur on development in the regions, and only indirect acknowledgement of the headwinds our exporters have been facing.

"Nevertheless we are pleased the Reserve Bank will enact as required its full range of macro prudential tools."

And here's the New Zealand Institute of Chartered Accountants

Peter Vial, NZICA general manager for tax, says: “The lack of major tax reform in today’s Budget is not a surprise as the Government’s focus is on constraining spending increases and rebuilding Christchurch, but bolder moves may be needed in the medium or long term.”

“The Government has not taken any radical steps to reform the tax base, having considered and rejected other potential changes such as a land tax or a capital gains tax,” says Mr Vial.

Finance Minister Bill English focused on big ticket issues such as housing, improved public sector efficiency, the Christchurch rebuild and poverty relief measures in Budget 2013. Some minor tax reforms were announced, says Mr Vial.

“It’s good to see the Government tackling some long-standing issues with certain types of ‘blackhole expenditure’ which is expenditure that is neither deductible nor depreciable. Specific areas targeted here are patents, resource consents, dividend payments, stock exchange listings and annual meeting costs.”

“It has been recognised that taxpayers should be able either to deduct such expenditure immediately or to capitalise it and depreciate it over time.” The Government is also proposing changes to allow small businesses to claim losses on research and development.

“The R&D tax break for small businesses will be useful provided the rules for accessing it are straightforward”.

The measure will be targeted at small R&D start-up firms and go into consultation in June. The Minister confirmed that changes will be made to the thin capitalisation rules mainly targeted at private equity investors. The changes are expected to generate $20 million over three years from 2014/15. “It is critical that the changes do not overreach and alarm foreign investors.”

“The detail is still to be finalised and NZICA will continue to engage with officials as they firm up on the proposals.”

Businesses and households will welcome significant ACC levy reductions. The levies will reduce by $300 million in 2014/2015 and potentially about $1 billion in 2015/2016. Tax revenue for the current year is up from the estimate by $1.5 billion. Peter says this not surprising given the economy has expanded and unemployment has dropped.

“A further sizeable jump is expected for next year, in fact the Government is banking on increases of about $3 billion per year for the next three years.”

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