2016 Government Budget


Familiarity yet to breed contempt

2016 New Zealand Budget

In any relationship, familiarity can breed contempt if the needs of either party fail to be addressed.

Not yet so with Budget 2016.

It is the 8th consecutive budget of the same Minister of Finance, a year before he will deliver an election year Budget which will be the precursor to the government seeking an elusive 4th consecutive term. If successful, the government will surpass the tenure of the previous three-term Labour led Government of Helen Clark, and when aggregated with the term of the previous government, marks a period of remarkable political stability for New Zealand.

A considerably more stable environment than many, including of course Australia, which over the same term as our current government has had four different Treasurers and five Prime Ministers (one twice).

Adding to the context is that the current government has had to navigate through the global financial crisis, which many economists consider to be the worst financial crisis since the great depression, and the eye watering costs that flow from the devastation of the Christchurch earthquakes; the taxpayer’s contribution now aggregating to over $17 billion. More recently the government has also seen the freefall of some of our most material commodity prices, with the dairy sector getting no more than a passing mention in the Budget.

Yet, even with that context, Budget 2016 offers a pattern of growing surplus’s in the mid-term (up to $5 billion by 2019), a current plan to reduce debt, the reality of relatively moderate headline tax rates that may be eased even further – particularly over the next term.

Quite a different position to what many of our trading partners find themselves in.

So while not a here and now issue, tax cuts (or at least changes) are quite realistically on the horizon, whether for the current government or others. A future choice as the Minister put it. A real challenge however given the spread of who pays what tax with 19% of the population paying 1% of personal income taxes at one end of the spectrum, and 8% of the population paying 40% at the other end.

Overall however, smart from a political perspective. The government has continued to dominate the middle ground. Last year the social measures were the clearest example of initiatives that encroached on non-traditional ground. Budget 2016 carries on that theme, largely through a plethora of additional measures spread across a number of areas – projected in a coherent fashion.

But notwithstanding that context, the degree of difficulty of what lies ahead cannot be underestimated.

As our recently released State of the State New Zealand 2016 [1] publication brought out, irrespective of who is in power, largely due to an ageing population, the long term outlook is far from rosy. If the current pattern of revenue and spending continues, net debt potentially looks to increase to over 200% of GDP from its current level of around 25% over the next four decades; noting that the nearer term outlook canvassed in Budget 2016 looks considerably rosier with net debt projected to fall to 19.3% in 2021.

The long term prognosis is not new or disputed. In fact, it echoes a sentiment long articulated by the Minister around the quality of government spending rather than the quantity, and in particular when it comes to the budget, the unwavering focus on the incremental spending rather than the aggregate amount already spent. Budget 2016 does nothing to dispel that phenomenon as was also brought out in his Q&As.

The quality of spending was explicitly brought out with the budget earmarking an additional $652 million as a “social investment package” that continues to look to focus on those most in need, looking at the root cause of some of the challenges – the ambulance at the top of the cliff.

Such a long-term view does not sit easily with a political cycle or environment that places a huge emphasis on the “here and now”. No different to some of the challenges faced by businesses who are judged by their last and next quarterly announcements.

Publically dominating the “here and now” is Auckland, a city that is bursting at the seams, as is played out in mainstream media on a daily basis. A world leader (in a negative sense) in terms urban sprawl and housing affordability.

Be that as it may, Auckland property fell quite short of taking its place on centre stage in Budget 2016. A further $100 million is to be provided to free up Crown land with very little extra said on what is a daily issue; recognising that even with this measure demand will continue to outstrip supply for the foreseeable future.

Absent from the explicit debate was the question of demand. Specifically, what the government can further do to dampen the demand including by encouraging other viable options outside of just Auckland.

In saying that, and while not joining the dots in that way, Budget 2016 does provide $94.4 million of new funding over the next four years for direct regional economic development activities; with the regions (in my mind defined as everything outside of Auckland) being a possible way forward in dampening demand in Auckland.

Not canvassed in the Budget was the recently announced $5000 grants for certain people to relocate outside of Auckland. An approach that is also quite at odds with our State of the State document that emphasises the importance of looking at the quality of the expenditure and in particular what can be done to curb a problem arising in the first place, rather than just looking to do something after it has occurred.

But for now, Budget 2016 is a long way from breeding contempt. It projects a state of positive equilibrium in the near term, somewhat underplays the projected surpluses, and provides no structural change in direction.

Positively there is also nothing precipitous to address any populous concerns attributable to the Panama Papers or the taxations of multinationals.

Through a plethora of actions it continues to starve others of the necessary political oxygen to thrive while leaving some of the long-term challenges largely unanswered.

It does however lay a foundation for a buoyant election year Budget or potentially more realistically post-election spending – not just for the incumbent government. A blank canvas that will be painted quite differently depending who holds the brush.

[1] www.deloitte.com/nz/stateofthestate

Media contact:

Matt Huntington
Deloitte New Zealand
Communications Manager
04 470 3771

Find out more:

2016 Budget Analysis


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