Govt will stick to fiscal policy in Budget

Bill English says the Government will not pursue cuts in services or income support in response to lower tax revenue. Photo / Jason Oxenham

So what if the track back to a fiscal surplus is proving longer and more uphill than it looked a year or even six months ago?

The Government will not be changing its fiscal policy settings in the May 21 Budget just because the Treasury is now expected to forecast a "slightly" bigger deficit in the current year than the $572 million it did last December and a "slightly" smaller surplus in 2015/16 than the half-year forecast of $565 million, Finance Minister Bill English said yesterday.

"We will not be pursuing cuts in services or income support in a kneejerk response to lower tax revenue."

And it will be sticking with the $1 billion allowance for new spending in this year's Budget and again in next year's.

Rightly so. The sums we are talking about, while large in absolute terms, are well within the margin of error when forecasting the difference between two large numbers with a lot of moving parts. They are less than 1 per cent of revenue or spending, and a fraction of 1 per cent of gross domestic product. It is the direction of travel that matters for the financial markets and that has been clear. In 2011 the deficit was the equivalent of 9 per cent of GDP, swollen of course by the earthquakes. It has halved, relative to the size of the economy, every year since then.

Both revenue and expenditure this year are around $4 billion lower than they were projected to be back in 2011 when the Government adopted the target of returning to surplus this year. And there was always a caveat about that. It was "subject to any significant shocks". Though not on the scale of the global financial crisis or the Canterbury earthquakes, the past year has seen a significant external shock in the form of steep falls in commodity prices including dairy and oil, cutting farmers' incomes and the inflation rate respectively.

But the Government has been a bit quick to blame low inflation, which reduces nominal GDP and with it the tax base, for its likely failure to make surplus this year. The most recent Crown accounts, covering two-thirds of the current financial year, show tax revenue running a healthy 7.5 per cent ahead of the same period a year ago.

While it would have some effect this year the main impact of lower inflation on the Government's finances would be over the next couple of years, English conceded. Forecast tax revenue over the next four years has been revised down by $4.5 billion.

The low-inflation excuse also glosses over the other side of the Government's accounts. As a purchaser of goods and services, an employer, a payer of interest and a distributor of indexed transfer payment it benefits from low inflation as well. The fiscal policy the Government took to last year's election included $1 billion for new spending in this year's Budget and next year's but $2.5 billion for potential tax cuts in Budget 2017 - election year. At this stage English is "confident about the ongoing improvement in the Government's finances". This time next year, if dairy farmers face a second lousy season and inflation is not much more than 1 per cent, it may be a sterner Finance Minister we see.