New Zealand Budget 2016: Bill English forecasts $700m surplus this year

The projections reflect a focus on repaying debt and achieving larger surpluses while keeping a lid on spending, English said. Photo / Getty Images

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Finance Minister Bill English has unveiled a rosier set of fiscal projections as the fastest population growth in 40 years drives economic growth and tax revenue, giving him room to spend more on health, law and order, and education while forecasting fatter surpluses.

The Budget forecasts a $700 million surplus this fiscal year, on an operating balance before gains and losses (Obegal) basis, a $1.1 billion turnaround from the Treasury's forecast in December. Over the five years through until 2020, the surplus is expected to be $6.2 billion bigger than was projected in December, reaching $6.7 billion in fiscal 2020.

Core Crown tax revenue over the forecast horizon is expected to be $3.6 billion more than was projected in December, and core expenses have been reduced by the same amount. Budget 2016 includes $8.69 billion in new gross spending, although the net spend is reduced to $6.7 billion because of savings and revenue initiatives.

Driving the improved government accounts is an economy forecast to grow an average 2.9 percent a year in the five years through 2020.

The Treasury identifies population growth as the biggest contributor to GDP growth this year and next, while per-capita growth takes over in 2018 via a combination of labour productivity and utilisation. It now expects net migration to peak at 70,700 in the year ended June 30 before returning to the long-run average 12,000 a year by June 2019, more than a year later than it projected five months ago.

"Strong population growth is both an indicator of New Zealand's economic performance and a contributor to it," English told the parliament in his Budget address. "For the first time in a generation, we have a net annual movement of people into New Zealand from Australia, rather than an exodus of Kiwis across the Tasman."

The projections reflect a focus on repaying debt and achieving larger surpluses while keeping a lid on spending, he said.

The fiscal projections incorporate a shuffling of priorities as well as extra spending, with English having ruled out tax cuts in 2017, the election year, in contrast to Prime Minister John Key's assertion that they are on the cards. English reiterated today that no decisions had been made on cuts nor had they been factored into assumptions.

Core Crown expenses over the next five years are expected to grow by $12.5 billion, or about $1.2 billion less than was projected in the Half Year Fiscal and Economic Update. The revenue increase has been more modestly revised, to $17.8 billion from $17.4 billion.

New operating spending for 2016 of $1.6 billion has borrowed $600 million from 2017's allocation, which English says recognises the pressures from higher population growth. A further $400 million has been taken from Budget 2017 to repay debt.

Net new capital spending has been reduced to $1.4 billion from the $1.7 billion flagged in the HYEFU, but with "capital recycling" total capex in Budget 2016 rises to $2.6 billion.

English said the government coffers still have about $700 million from the selldown of state-owned electricity companies and $1 billion would be freed up via the repriorisation of Kiwibank's capital, where the two biggest state funds would directly take a share in the lender. There was also the proceeds from the sale of surplus Crown land and a decision to sell a loan to Auckland Council for rail stock back to the city.

Budget 2016 projects net core Crown debt to peak at $68.3 billion in 2018, before reducing to $62.3 billion in 2020. As a percentage of GDP, it peaks at 25.6 percent in 2017 and retreats to about 21 percent in 2020.

The budget cycle is designed as a no-surprises model and in the run-up to today's announcement initiatives worth some $700 million have already been made public, ranging from cycle trail funding and health research to a tax package for small and medium-sized businesses worth $187 million over four years.

Health is the biggest winner in terms of new operating spending, with some $2.3 billion allocated over the five-year projection, using the OECD's functional classification framework. Law and order gets the next-largest increase, at about $1.1 billion. Education gets $828 million, social security $677 million and defence $303 million.

Housing and community gets a more modest additional $137 million. Core government surpluses get an extra $871 million.

There's little help provided directly to the Reserve Bank to assist in its battle to lift inflation back to the mid-point of its 1 percent-to-3 percent band. The core Crown 'fiscal impulse', a measure of the extent that fiscal activity adds to GDP, is assessed at -0.1 percent in 2016, before adding 0.4 percent in 2017 and detracting from growth in each of the following three years.

But the government's decision to increase the tobacco excise by 10 percent a year over four years, the second such cycle of increases, starting Jan. 1, 2017, will add to headline inflation.

Economists are expecting the Reserve Bank to cut the official cash rate a quarter point to 2 percent in June, although there is growing speculation it will wait until its August monetary policy statement.

Budget 2016 anticipates one further cut to the OCR.