By Bernard Hickey
The Government unveiled a healthier budget and economic outlook at the half year mark on Tuesday and immediately used the fiscal headroom to cut borrowing in an effort to keep the upward pressure off interest rates and the New Zealand dollar.
But the Government also has also kept some powder dry to announce new "public investment" projects in the May 2014 budget ahead of the next election expected in November. However, Finance Minister Bill English again said tax cuts in the May budget were unlikely. He also said house price inflation appeared to have peaked around 10%.
Releasing the Half Year Economic and Fiscal Update (HYEFU), the Government's Debt Management Office (DMO) announced plans to reduce borrowing by NZ$2 billion to NZ$8 billion in the year to June 30, 2014, and to buy back NZ$3 billion of April 2015 bonds in the first half of calendar 2014.
The net reduction of NZ$5 billion in the Government's borrowing requirement for the current year followed an improvement in the Government's underlying budget position after a surge in economic growth in the second half of calendar 2013.
The announcement of the cut in the borrowing programme saw bond yields fall around 10 basis points. Economists saw room for further borrowing reductions next year, given the relatively small accounting surplus projected by the Government disguises a stronger underlying position.
The Government reported a combination of stronger export prices and higher net migration would help boost economic growth to 3.6% in the year to March 2015.
Treasury forecast a Budget surplus after extraordinary gains and losses (OBEGAL) of NZ$86 million, almost exactly where it was forecast in the May Budget. This was despite a NZ$400 million improvement in expected tax receipts and spending. The improvement was offset by assumptions about how low interest rates and more stock holdings by ACC and NZ Super Fund would affect interest earnings by these big funds.
Surpluses are then forecast to increase to NZ$1.7 billion, NZ$3.1 billion and NZ$5.6 billion respectively in the following three years. Debt is forecast to fall, with net core Crown debt expected to peak at 26.5 per cent of GDP in 2014/15, before falling to 16.9 per cent of GDP in 2019/20. This allowed the Government to bring forward by one year the resumption of contributions to the NZ Super Fund.
“Signs are that the pace of growth has picked up appreciably in the second half of 2013," Finance Minister Bill English said.
GDP is expected to grow 2.3% in each of the following three years after 2014/15 and average wages were rising faster than inflation, English said.
He warned the Government needed to keep clear fiscal policy settings to create jobs and raise incomes.
“The Government remains committed to responsible long-term fiscal management,”he said. “Improving public sector performance will assist in ongoing spending restraint beyond 2014/15, so we can pay down debt in dollar terms from 2016/17 and build a buffer against future shocks," he said.
“It is also important to avoid the mistakes of the mid-2000s, when large increases in government spending and a booming housing market drove up interest rates and the exchange rate and eroded productivity.”
Westpac Economist Anne Boniface said the update confirmed the accelerating economy had strengthened the Government's position and reduced its need to borrow.
"The improvement was much greater than the tiny increase in the forecast budget surplus for 2014/15 would suggest. But rather than making plans to spend this additional revenue, the Government has remained cautious, opting to rebuild buffers and reduce borrowing. All this comes as no surprise, but it remains to be seen whether such a conservative policy will be quite as strictly adhered in the lead up to next year’s election," Boniface said.
"The improvement in the economy has left the government well-placed should it choose to bring some treats out of the bag in election year," she said.
TD Securities Economist Annette Beacher said the strong fiscal update contrasted with a weak one in Australia.
"Given three years of above-trend growth already in the bank, convincing asset sales to reduce debt, and a strong broad-based revenue stream, we believe there is a strong case for an outlook upgrade to AA/positive next year," she said.
ASB Economists said the Government's accounts looked tidy. "There is some flexibility to consider modest tax cuts or spending increases timed towards the end of the next parliamentary term," they said.
ANZ Economist Cameron Bagrie also said the update would be viewed favourably by ratings agencies.
"The fiscal stance is a tad more restrictive than flagged in the 2013 Budget and the temptation to loosen the purse strings once surpluses are achieved is being resisted, with a strong emphasis on discipline during an economic expansion," Bagrie said.
"This will assist monetary policy settings remaining more accommodative than would otherwise be the case," he said.
"A return to surplus by 2015 should comfortably be achieved, and strong fiscal numbers may even allow for some loosening of the purse strings ahead of the late-2014 election though we note today’s statement as being very strong on fiscal discipline over the economic cycle."
BNZ Head of Research Stephen Toplis said it would be a shame if the electorate forced the Government to drop its fiscal discipline.
"When an economy is running as strongly as New Zealand’s is likely to be in the year ahead, and when monetary policy is already providing significant stimulus, the last thing you need is Government adding petrol to the fire," he said.
Labour Finance Spokesman David Parker said the economic growth was attributable to the NZ$40 billion rebuild in Canterbury and the best terms of trade in 40 years. He said the National-led Government had overlooked the interests of most New Zealanders.
"National conveniently seems to have forgotten that the overwhelming majority of New Zealanders aren’t better off than they were five years ago. Wages are stagnating and job growth is lagging behind economic growth," Parker said.
“National’s short term thinking means that despite the best terms of trade for 40 years, the Government still hasn’t rebalanced the economy towards exports and better paid jobs," he said.
Green Co-Leader Russel Norman said National had failed to rebalance our economy away from debt and consumption towards savings, investment, and exports.
“Treasury are predicting the current account deficit to worsen to 6.5 percent of GDP by 2017. We are funding a large part of this economic growth cycle with debt, not income," Norman said.
(Updated with more detail, comments from English, Parker, bond yields falling, economist comment)