Friday, May 27, 2016

Frank Newman: Budget 2016

Budget 2016 was safe and predictable, pretty much like the persona of Finance Minister, Bill English. This is the eight budget Bill English has delivered.

Some say his budgets lack vision. It may be true to say they lack excitement but it's not fair to say they lack vision. His long-term objective is very clear, it's just that it happens to be a vision that most people don't get excited about.  His goal is to have net debt down to 20% of annual GDP (gross domestic product - the value of goods produced by our economy) by 2020. That net debt is forecast to peak at 25.6% of GDP next year and drop below 20% by 2020/21.

Mr English is also forecasting average GDP growth of 2.8% to 2020, falling unemployment, rising wages and the Government’s books back in the black (at which time tax cuts may be contemplated).

Reaching those targets would be an astounding achievement, and set New Zealand apart from most other countries which are spending up large to resuscitate their economy (with limited success).  Some say the figures are over-optimistic, and perhaps they are, but even if they are not fully achieved, it's still a good news story.

Regardless of one’s political bias, it has to be accepted that Bill English has delivered stable financial management. His conservative style is a low risk approach without being stingy when it comes to the Government’s social responsibilities. The key spending areas identified in Budget 2016 show that.

In the social spending area there is $2.2b earmarked for new health initiatives, $1.4b for education, and new spending in social housing and social services to support vulnerable families.

The health initiatives include more funding for elective surgery and a new national bowel screening programme. As previously announced, Pharmac is to receive additional funding for "miracle" drugs in the treatment of melanoma and hepatitis.

To service a growing economy a $761m new spending package has been earmarked for science and innovation, education and apprenticeship programmes, and regional economic development. Clearly it recognises the importance of innovation and the need to upskill if they are to shift from welfare to work.

Other note worthy commentary included the Prime Minister declaring an intention to release a national policy statement to address the housing shortage. He said, "This is what the national policy statement will will ensure that councils must make available sufficient land to accommodate is no longer a matter of choice."

In other words, council staff will be forced to give up their "smart growth" agenda (which is based on the idea that growth should be concentrated in compact urban centres). That short-sighted doctrine is largely to blame for the predicament Auckland now finds itself in, but astoundingly that same philosophy has been used by local council staff everywhere to oppose subdivisions, even in largely undeveloped areas like Northland.

It's great news that central government is now forcing local councils to address the issue of land supply. Unfortunately, a new national policy takes some years to put into effect, and they have woken up to the problem way too late. Some RMA commentators raised the red flag about so-called smart growth 20 years ago!

All in all, one would have to say the Budget addresses many of the high priority imperatives but without being spendthrift. It is low risk in that it will not cause the economy to deviate from its current course (unlike others who would take us down a high-risk renewable energy path).

Property owners will be pleased that they have not been signalled out for special tax treatment. The ring-fencing of rental property losses was not mentioned, possibly because it is no longer such a big issue since the depreciation on residential buildings was removed.
Should Mr English's financial projections be achieved, or even largely achieved, New Zealand will become even more attractive to immigrants and returning Kiwis, so don't expect the pressure on housing to diminish any time soon. 

I am confident about the economy going forward. Dairy prices appear to be at or near a bottom so improvement is around the corner (despite that corner being a long sweeping bend). The building sector is likely to remain strong as the housing catch up continues, and the trade opportunities opened up by the free trade agreements are likely to grow exponentially (Manuka honey exports into China being an example).

Budgets are a little like exercise equipment, lots of people have them but few put them into effect. The test is whether National can keep its nerve ahead of next year's general election and resist the temptation to spend up large.

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