Bernard Hickey previews Thursday's Budget and points to five key factors to watch, including on growth, the surplus, the NZ Super Fund and tax. Your view?

By Bernard Hickey

Budget 2014 due at 2 pm on Thursday is shaping up as a major milestone for this Government and a catalyst for debate ahead of the September 20 election.

The Government has previewed that it will mark the fulfillment of a key pledge to get the Budget back into surplus and as proof of the Government's economic management. The Labour, Green and New Zealand First parties are, meanwhile, set to propose their own Budgets and targets and to attack it as proof the 'Rock Star' economy is great for the rock stars, but not for the wider audience.

So what should we all be looking for when the Budget is released?

Here's a few signposts to the key forecasts and details, based on the Government's pre-budget comments and how the economy is travelling.

The surplus

It's been a long time coming, but the Government is confident Budget 2014 will finally forecast the first surplus since it was elected in 2008. The Treasury's most recent forecast in December was for a NZ$100 million surplus in the year to June 30, 2015.

Finance Bill English and Prime Minister John Key have repeatedly said they expect to forecast a small OBEGAL (Operating Balance Excluding Gains and Losses) surplus. John Key described it in a pre-Budget strategy speech last month as 'wafer thin', while Bill English described it as 'small' in this April 15 pre-Budget speech.

The relatively small size of the surplus comes despite stronger than expected economic growth. The Treasury forecast production GDP growth of 2.5% in the year to March 2014 in its May 2013 Budget. It upgraded that forecast to 2.7% in December and said as recently as last week in its Monthly Economic Indicators that the economic growth outlook was now slightly stronger than it had forecast in December. It forecast growth would rise to 3.6% in 2014/15, before easing back to 2.2% in 2017/18.

But that growth is frustratingly not turning into a much better budget outlook. GST and individuals' tax receipts have been lower than expected in recent months, meaning the budget deficit has been larger than expected. We don't know the reason, although there are suggestions increased purchases online offshore (GST free) and relatively low wage growth could be factors. We hope to find out more in the Budget papers.

The real interest in the budget will be the expected increases in surpluses in the 'out' years beyond 2014/15. The December forecasts suggested the OBEGAL surplus could rise to NZ$5.6 billion or 2.1% of GDP by 2017/18.

The wage inflation

English made a big play in his pre-Budget speech of saying wage growth was expected to pick up in line with stronger economic growth and this was how the benefits of the Government's policies would be spread around. He forecast the average full time wage would rise by 20% or an average 3.3% per annum in the six years to 2018, which would increase the annual average by NZ$10,500 to NZ$62,200.

Treasury forecast in December that average ordinary time wage rates would rise by 2.7% in the year to March this year, 3.2% the following year, 3.2% in 2015/16 and then 3.4% each in the following two years.

However, last week's figures showed disappointingly weak average wage inflation (as measured by the Quarterly Employment Survey) of 2.5%, meaning wage inflation is already slower than English has suggested. This is problematic politically and another drag on the budget, given 'bracket creep' or 'fiscal drag' is usually a reliable way in which budget surpluses expand during an economic expansion.

If the Budget figures are lower than those December forecasts then that will be a headwind for the budget and will be dragged into the political debate around whether the "rock star" economy is good for both the stars and the audience.

English has previewed, however, that Treasury is forecasting the unemployment rate would fall to 4.4% by 2018, which is lower than the 4.7% forecast by the Treasury in December and the 6.0% currently.

The operating allowance

This is an idea the Government focused on in 2011 and 2012 when it ran what it called 'zero' budgets. This refers to the Government not spending any extra in total on those 'discretionary' areas such as Health and Education, but still allowing for extra spending on benefits such as New Zealand Superannuation. In those budgets, spending on health and education and other core government spending (aside from benefits) was reprioritised so growth in some areas was offset by cuts in others.

The Government eased a couple of notches on its belt in May 2013 when it ran an operating allowance of NZ$900 million of new spending in 2013/14. It then forecast an operating allowance of NZ$1 billion of new spending in 2014/15. Key and English have both confirmed over the last month the government would stick to that NZ$1 billion for 2014/15, despite the better economy.

Within that 'envelope' of new spending, there have already been a slew of relatively small announcements. Here's Bill English's list of 'pre-announcements' up until April 28.

The choice about surpluses

The budget debate and the election debate will focus on what the Government might choose to do with the surpluses likely after 2014/15. Bill English has been cautious about saying what those surpluses could be used for, focusing firstly on debt reduction, but also leaving open other options. English's last comment was after fresh Treasury figures showed the deficit so far this financial year was NZ$199 million worse than forecast, but that a small surplus in 2014/15 would grow in future years.

“This will give us choices about repaying debt, investing a bit more in priority public services and, eventually, resuming contributions to the New Zealand Superannuation Fund," English said.

In the last May Budget the Government delayed the resumption of contributions to the New Zealand Superannuation Fund by two years to 20/21 to ensure that net debt was first reduced to 20% of GDP. It suspended the contributions in 2009.

The other not-often-mentioned use for surpluses could be to rebuild the Earthquake Commission fund, although no decisions have been made yet about the fund's future.

The housing news

There has been plenty of Government policy moves over the last year to try to increase housing supply and address the recent surge in house prices in Auckland and Christchurch. The Government has created the Housing Accords and Special Housing Areas Act that underpinned the Housing Accord with the Auckland Council and the announcement of 63 Special Housing Areas for the development of 33,500 homes in Auckland.

The Government is also pushing through reforms of Housing New Zealand to sell off larger houses in expensive areas to build smaller houses in cheaper areas, along with providing income related rent subsidies to tenants in community housing projects run by social housing organisations.

Bill English also spent an unusually large amount of time in his pre-budget address on housing issues and constraints around new supply in Auckland.

"It’s important that we continue to focus on every measure that can reduce the cost of housing over the next few years," he said.