A budget surplus, economic growth at 4 percent, and net government debt projected to fall to around 20 percent of gross domestic product (GDP). Finance ministers across the Asia-Pacific region, including neighboring Australia, could only admire the “beautiful set of numbers” announced by New Zealand on Thursday.
As PwC New Zealand tax partner Geof Nightingale commented, “This is the budget Australia will be hoping for in 2018.”
New Zealand said it would become one of the first developed nations to return to budget surplus since the global financial crisis (GFC), posting its first surplus in seven years after recent “zero budgets” and flagging pre-election tax cuts.
Finance minister Bill English forecast a NZ$372 million ($321 million) surplus in fiscal 2015, rising to NZ$3.5 billion by 2018, compared to the NZ$2.45 billion deficit expected in the current fiscal year to June. Economic growth is forecast to average 2.8 percent a year over the next four years, peaking at 4 percent in 2015, helped by strong dairy exports to China and rebuilding efforts in Christchurch after the damaging 2011 earthquakes.
After racking up deficits following the GFC, net government debt is forecast to peak at NZ$66 billion by 2017, or 26 percent of GDP, with the government aiming to reduce it to 20 percent by 2020. According to the International Monetary Fund’s April 2014 fiscal monitor, in 2013 net government debt averaged 73.5 percent for developed economies, including 81 percent for the United States and 134 percent for Japan.
“If tax revenue comes in well ahead of forecast, the government’s main priority will be additional debt repayment until the 20 percent debt target is met,” English was quoted saying by the New Zealand Herald.
Perhaps looking ahead to the September 20 national elections, English included NZ$500 million worth of handouts for families, including free doctors visits and medical prescriptions for children under 13 years and extended paid parental leave.
Australia’s Budget Blowout
New Zealand’s upbeat projections were in stark contrast to Australian treasurer Joe Hockey’s maiden budget Tuesday, where he announced A$80 billion ($74.8 billion) worth of spending cuts in a bid to achieve a balanced budget by fiscal 2019, declaring “the age of entitlement is over.”
Australia’s Treasury forecast a near A$30 billion deficit for the fiscal year to June 2015, down from the A$50 billion expected this fiscal year, with a raft of tax hikes and spending cuts despite pre-election promises of no cuts.
“The days of borrow and spend must come to an end. The time to contribute and build has begun,” Hockey said in a statement. Net debt is expected to reach 13.9 percent of GDP in fiscal 2015, its highest level since 1998, and to peak at 14.6 percent in 2017.
Noting the economy’s transition from resource investment to other sectors, the government said real GDP would continue “below trend” at 2.5 percent in fiscal 2015, rising to 3 percent the following fiscal year, hit by reduced prices of key exports such as iron ore and coal.
In its first budget, the Abbott government included politically unpopular cuts to welfare and education spending along with a hike on high-income earners, as well as raising the retirement age to 70 by 2035, the highest among OECD nations.
However, budget winners included A$11.6 billion spending on infrastructure, a A$20 billion medical research fund, an exploration incentive for miners, and a promised 1.5 percentage point cut in the company tax rate from July 2015, in addition to the proposed abolition of the carbon and mining taxes.
Responding to opposition Labor party criticism of a budget built on a “manufactured crisis,” Hockey told reporters, “’She’ll be right’ is not a policy solution to the budget crisis that Labor left.”
Labor leader Bill Shorten threatened a veto of A$18 billion worth of budget cuts amid talk of fresh elections, while New South Wales state premier Mike Baird, a member of Abbott’s Liberal party, described the budget as a “kick in the guts” to his state.
However, economists’ reaction was milder, with JPMorgan Chase & Co’s Stephen Walters noting “little market reaction.” ANZ Research said most of the savings would impact after the next election planned for 2016, with the additional near-term tightening of fiscal policy to be “quite modest.”
“This budget will be a mild headwind for the recovery in the non-mining economy that is now getting under way. While estimating the overall effect on the economy from fiscal policy is very uncertain, we expect it to have a modest drag on growth, on average, of roughly [0.25 to 0.5 percentage point] per annum,” ANZ economists Warren Hogan and Cherelle Murphy said in a May 14 research note.
ANZ said the budget “reinforce[s] our expectation that the [official] cash rate will remain unchanged this year,” with interest rate hikes not expected until 2015.
Across the Tasman however, the New Zealand central bank has already hiked rates twice this year to cool a housing boom, and HSBC economists said another increase was likely in June, contributing to a higher exchange rate.
Associated Press writer Nick Perry noted that while Australia had traditionally lured New Zealanders with higher wages and more career opportunities, the trend “now appears to be reversing.”
Perry cited data from Statistics New Zealand showing a net 13,000 Kiwis moved to Australia in the year to March, down from 36,000 a year prior, with some officials apparently now predicting “a flow of Australians to New Zealand.”
Former New Zealand prime minister Robert Muldoon once famously quipped that New Zealanders emigrating to Australia “raise the IQ of both countries.” For Aussies though, the joke is wearing a little thin amid the prospect of working longer and paying more tax.