'Sweet spot' Budget marks NZ as stand-out economy as Crown balance sheet strengthens

Thursday 15th May 2014

Two days after Australia's black budget, New Zealand Finance Minister Bill English has unveiled a Crown balance sheet where revenue growth runs ahead of expenses in an economy accelerating to the fastest pace in a decade.

English confirmed a return to Budget surplus in 2015 at $372 million, wider than the $86 million projected in the half year economic and fiscal update. Core Crown revenue is forecast to rise 32 percent to $84.7 billion by 2018, while expenses rise at half that pace - 16 percent - to $81.5 billion in the same period. Net core Crown debt rises 16 percent to $64.9 million by 2018.

The New Zealand economy is forecast to grow 4 percent in the year ending March 31, 2015, the fastest since growth of 4.2 percent in 2004 and an improvement on the 3.6 percent pace the Treasury was projecting back in December. That's faster than growth expected in Australia, the US, UK, Canada, Japan and the euro region. Over the five-year forecast horizon, New Zealand's real gross domestic product growth is to average 2.8 percent.

"A broad-based economic recovery is now well established," English said. "New Zealand is among the first developed countries to achieve a return to normal economic settings," he told a briefing in Wellington.

In stark contrast, Australian Treasurer Joe Hockey this week released an ambitious package of measures aimed at tackling a budget deficit estimated at A$49.9 billion for the year ending June 30, cutting spending on welfare and education, slapping a temporary tax on the wealthy and increasing the fuel levy for motorists.

Just four months out from New Zealand elections, the National administration has flagged $1.5 billion of extra spending for 2015 and increases amounting to 2 percent a year beyond.

It includes a $500 million package of support for children and families. Paid parental leave will be extended by four weeks by April 2016, associated tax credits have been increased, free doctor visits extended to all children under 13, a $155.7 million boost to early childhood centre spending and $33.2 million for services targeting vulnerable children.

The government also plans to slash ACC levies by about $480 million in 2016, subject to public consultation. That would amount to a $130-a-year cut to the average levy for a private motor vehicle

Among what the government described as "moderate new spending allowances" are a $375 million loan to the New Zealand Transport Agency, an extra $69 million over four years for New Zealand Trade and Enterprise. It also includes an additional $57 million of contestable science funding, $58 million on increased tax deductions for research and development and an already announced target of 6,000 extra places on the government's apprenticeship scheme.

Science, agriculture and health science funding get an $83 million boost and $53 million is earmarked to establish three extra 'Centres of Research Excellence starting in 2016.

The government also announced it is temporarily removing tariffs and duties on imported building products estimated to cut the cost of an average home build by $3,500 and adding $30 million to the Social Housing Fund that provides community housing for high-need families.

The upbeat Budget may further enhance National's opinion poll lead over Labour - 47.6 percent in this week's Fairfax poll while Labour sank to 29.5 percent.

Underpinning the government's Budget are Treasury forecasts that employment will grow 3 percent in the year ending March 31, 2015, while the unemployment rate is projected to fall to 5.4 percent from 6 percent currently, and continue to decline, reaching 4.4 percent in 2018.

Terms of trade at a 40-year high, driven by strong dairy prices and volumes, net migration that's expecting to climb to 38,000 this year from 32,000 in the year to March 31 and a Canterbury rebuild priced at $40 billion, half of which is to be spent by 2018 are all helping bolster demand and growth.

Yet while spare capacity in the economy is eaten up, inflation is forecast to hold below the midpoint of the Reserve Bank's 1 percent-to-3 percent target range this year, before peaking at a relatively mild 2.5 percent in 2016. That's likely to mean the central bank's tightening cycle entails a more modest round of interest rate hikes than was the case a decade ago.

BusinessDesk.co.nz

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