Brian Fallow: Decent stimulus in today's Budget

Brian Fallow. Photo / NZ Herald

Bill English has delivered more of a Budget than the signs and portents led us to expect.

It goes further in income tax relief, especially for those earning less than the average wage, and it provides business with a company tax cut much earlier than hoped for and ahead of the Australians.

This has to be paid for, but there is a crucial timing gap between the two sides of the ledger.

The result is that the Budget avoids the potential trap of being too austere and fiscally virtuous too soon, when the recovery is still in a young, frost-tender stage.

For the year ahead there is a decent stimulus in today's numbers.

For all the talk of a tight rein on expenditure, Government spending is set to rise nearly $6 billion or 9 per cent in the coming year. Much of the surge is one-offs, such as the compensation for superannuitants and beneficiaries for the 2 per cent rise in the cost of living the GST increase will inflict.

The net effect, in any case, is a $10 billion Budget deficit or 5.1 of GDP, wider than the current year's $8 billion and 4.4 per cent.

But now is the time for a bit of fiscal laxity, from the standpoint of households and the mass of small businesses chasing the consumer's hard-earned dollar.

The labour market is weak, income growth is sluggish. Mortgage rates are set to start rising, while real wages shrink as the forecast 2.4 per cent increase in nominal wage is dwarfed by a 5.9 per cent rise in in the cost of living over the year ahead.

That fall in real wages will be at least partly offset by income tax cuts, and while the spike in inflation will be temporary, the tax cuts stay.

What the Government has sacrificed is the goal of a fiscally neutral tax package, at least up front. The deficit in the coming year will be nearly $500 million larger than otherwise would have been, though that disappears in the out years as the offsetting base-broadening measures kick in.

It is a small price, worth paying.