[Budget Preview] Watching for surprises

www.goodreturns.co.nz

Wednesday 27th May 2009

The National government's first Budget is something analysts like AXA Global Investors chief economist Bevin Graham will be watching closely for guidance and surprises.

Graham says the first budget of any new government is always fascinating as it sets the fiscal tone for its whole term. He says it is even more important this time around because of the current economic climate New Zealand is in.

Graham feels that many of the key issues have been well-flagged and as long as they come true then there isn’t likely to be any changes to AXA’s investment approach.

However, surprises may be cause for change. AXA Global Investors takes the view that the economy will stay in recession, but will slowly improve. There is unlikely to be any move back to sustained growth this year, he says.

“The Budget is not likely to change our view (on the prognosis for the economy).” The economy will have twin deficits and debt levels will increase.

The Budget will have to show a plan to balance the government’s expenditure and revenue along with its funding plans. He says the potential areas of surprise will be if the government presents a plan that the market don’t believe in.

This he says will be judged on “the credibility of the underlying economic assumptions used in the budget”.

If the market interprets the assumptions as being too optimistic then there could be a change in the market’s view of the economy.

He says the market is expecting that the next two tranches of tax cuts will be cancelled.

Keeping them would be a surprise, he says.

On the superannuation side Graham is expecting that the government will stop or lower its contributions to the NZ Super Fund. He is not expecting many changes around KiwiSaver, as these have already been made by the government. Graham’s view on Thursday’s Budget: “It’s going to be fascinating.” Read

Graham’s full Pre-Budget report here.

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