Budget 2012 to be zero, or very close to zero budget, as govt tries to reach 2014/15 surplus, PM Key says

Budget 2012 is likely to include very little new spending, if any at all, Prime Minister John Key says.

Speaking to media at his post-Cabinet press conference on Monday afternoon, Key said reaching the government's target of hitting a surplus in the 2014/15 year had been getting harder to reach.

“That’s a result in the weakness in the global economy, and, for example, some increasing earthquake costs," Key said.

"But we are making decisions to ensure we get back to surplus by our target date of 2014/15. It’s important to meet that target because every year we’re in deficit, we have to borrow more to fund that,” he said.

“Our overall fiscal position means, as I said on Q&A [Sunday] morning, that we’re likely to have another zero budget this year or very close to it.

“What that means is our new spending over the next four years in priority areas like health and education, will largely be offset by savings in lower priority areas and tightening up tax loopholes and tax avoidance,” he said.

Changes tune

Key initially made his zero budget comments on on TV One's Q&A programme on Sunday. On Monday morning, Key defended the government's economic policies, including the 2010 'tax switch' and use of its balance sheet to aid the economy through the recession.

He said the need for such a tight Budget 2012 was the government's desire to reach surplus in the 2014/15 year. Budget 2012 will be released on May 24. The government had been planning to only increase its operating allowance in the upcomming budget by NZ$800 million, following a 'zero Budget' in 2011.

As recently as February 13, Key had said the government was committed to that NZ$800 million of new operating spending in Budget 2012, with the increase delivering for inflation and population adjustments in Health and Education spending.

That was after Key had said Treasury was to revise down its forecast 2014/15 surplus from NZ$1.45 billion to somewhere in the NZ$300-500 million range. Treasury announced on February 16 that it expected a NZ$370 million surplus in 2014/15, as it revised down its near-term growth forecasts due to weaker-than-expected trading partner growth, and a delayed start to rebuilding activity in Christchurch.

The latest set of government accounts, for the seven months to January 31, showed core Crown tax revenue collected so far in the 2011/12 year was 3% below what Treasury had forecast in its October 2011 pre-election update. There were risks revenue collected in the 2011/12 year would be lower than expected in the February 2012 Budget Policy Statement, Treasury said on March 6.

'It could be another zero budget'

"Last year’s budget was a zero budget. What I’d say to NZers tonight is that there is every probability that this year’s budget in 2012 will either be zero or very close to a zero budget, and that’s because the government’s absolutely committed to going back into surplus by 2014/2015," Key said on Q&A on Sunday.

"That’s my expectation. It’ll be either a zero budget or very close to zero. What that means is we will spend more money in health and education, but all other ministries will be expected to save money. Why are we doing that? Well, because we need to get NZ back into surplus so we’re not racking up more debts and more defecit so that future generations aren’t continuing to pay for debts that we would be racking up today," he said.

"So in the four years [we have been in government] we will have delivered budgets, we will have spent about NZ$2 billion worth of new money over that four-year period, effectively, of new expenditure through the budget process."

Defends tax cuts

Meanwhile, speaking on TV One’s Breakfast programme on Monday morning, Key defended the tax cuts made in the 2010 Budget, having been asked whether they were in fact neutral.

“They literally were neutral,” Key said.

“Corporate tax is always the most volatile. It’s strong when the economy’s strong. It’s a lagging indicator. You ultimately get that revenue after things have happened, and now things are starting to pick up again – it takes a while for it to come through because of the provisional nature of tax," he said.

"But if you look at the switch we made, charging people more in terms of GST, and ultimately in property taxes and other loopholes, vies-a-vie the personal tax cuts, they’re neutral. We’re satisfied with those.”

The incentives generated by the 2010 tax changes were working.

“For a start off, one of the things that you’re trying to do, is lift the national savings rate. When you lift consumption taxes, and lower personal taxes, you encourage people to save. That’s definitely happening – we’ve got a positive savings rate in New Zealand now," Key said.

“Secondly, you have the right incentives for people to get ahead, to work, to go and earn an extra dollar. That’s also happening. The economy is growing. It’s grown ten out of the last eleven quarters. Department of Labour came out the week before last and said they anticipate 100,000 jobs created over the next two years. So we’ve got a growing economy," he said.

“It’s not easy. Everywhere in the world it’s challenging at the moment. But I think, for the most part, we’re doing better than most countries.”

See Bernard Hickey's Sunday piece, Are we saving too much to be able to afford those recent tax cuts? Bernard Hickey says we now have our tax settings seriously out of whack.

‘We’ve used debt to cushion the blow’

Key said New Zealand’s debt levels had risen under his government due to the costs associated with the Christchurch earthquake, and as the government “unashamedly,” used its balance sheet to aid the economy through the recession.

“If we hadn’t done that, then unemployment would have risen much more severely, or we would have had to cut entitlements and benefits. We didn’t do that," Key said.

"But now the economy’s stronger, we’ve...just got to be focussed on getting on top of debt and the deficit,” he said.

Getting worse?

On February 13, 2012, after foreshaddowing a lower-than-expected 2014/15 surplus of NZ$370 million, down from NZ$1.45 billion in the October 2011 pre election fiscal update, Key said the government was committed to increasing its operating allowance in 2012 by the NZ$800 million earmarked in the previous budget. Treasury also forecast a spending increase of NZ$800 million in Budget 2013.

Operating spending increases would then rise to NZ$1.2 billion in subsequent budgets.  

“It could be lower if we really saw a catastrophic meltdown in Europe, but at the moment that seems to have stabilised a little bit in the last week or so,” Key said on February 13.

The only sectors of government to receive more money would be Health and Education, and only then to cater for inflation and population adjustments.

"So it’s going to be tight for both of those big spending ministries, let alone anybody else," Key said on February 13.

"That shows you why the government needs to save money. If we’re going to pay for the general wage rounds that we get, and the other cost pressures, then we’re going to need to find savings in other places," he said.

See Key's comments in the video below:

And that's just operating allowances

Any new capital spending in the next five years, such as that on schools or hospitals, will be paid for from money raised from the NZ$5-7 billion partial sell-downs of four state-owned energy companies, and the government's three-quarter stake in Air New Zealand.

The government has already allocated NZ$1.48 billion of the expected revenue from its 'mixed-ownership model' partial floats, with NZ$1 billion to be spent on upgrading schools, NZ$400 million to be invested in irrigation schemes, and NZ$80 million spent on a technology centre in Auckland.

The 49% sell-downs of Mighty River Power, Genesis Energy, Meridian Energy, and Solid Energy, will begin in the third quarter this year with Mighty River Power the first cab off the rank.

What's happened?

The latest set of government accounts, for the seven months to January 31, showed core Crown tax revenue of NZ$31.4 billion was 2.9%, or NZ$946 million, less than forecast in October's pre-election fiscal update.

When releasing those figures on March 6, Treasury said there was a risk that revenues for the full 2011/12 year would be lower than forecast in the February 2012 Budget Policy Statement, which was released on February 16.

The Budget Policy Statement forecast lower near-term growth due to weaker-than-expected trading partner growth, and a delayed start to the Christchurch rebuild. Since the BPS came out, Statistics New Zealand noted the economy expanded 0.3% in the December quarter, which was half of what was expected by the market.

The government accounts for the eight months to February 29 are set to be released at 10am this Wednesday.

See Finance Minister Bill English's reaction to those figures in the video below:

(Updates to include 2013 as having an NZ$800 million operating allowance increase, as well as Budget 2012.)