Budget 2018: The gift that keeps on giving – our economy
By Thomas Pippos
The rivers of gold may have started to run in Australia, but New Zealand isn’t looking too shabby either.
Crown tax revenue is forecast to increase by $3.9 billion, from $75.6 billion in 2017 to $79.5 billion in 2018 - and is projected to grow to $99 billion by 2022; a $23.4 billion increase over 5 years. Treasury predictions are that in four years the Government will have $23 billion more to spend each year than what it had. A whopping 31% increase.
Dealing with its remaining income and already committed expenditure, we are still talking about the Government having approximately $12 billion a year extra to allocate in 2022 than what was forecast it would have in 2018, even after factoring all its currently announced initiatives and the existing base line.
Traditionally this type of detail would be front and centre of a Budget, and it no doubt would have been had the previous Government remained on the Treasury benches. But there is no point dwelling on the economy that the Government inherited, but rather on the journey to wellbeing that the new Government has more than visibly pivoted to. This is not a surprise, and similarly not a criticism, as the economy is projected to be the gift that keeps on giving with growth rates ahead of many of our trading partners.
From a global perspective, our Government has truly landed on their feet and would be the envy of many. This is not to say that there isn’t a lot of unfinished business as highlighted by Government in its 2018 Budget, but rather that they are presented with considerably more options than if the favourable fiscal projections were not there. It’s easier to give than to take away.
Now the thing with the golden goose that is our economy, and accepting that it could always shine more brightly and from more angles, is that it can’t be taken for granted. Revenue projections don’t factor a shock, not that they can, but some form of economic shock will occur at some stage. Clear examples in the previous Government’s term were the global financial crisis and the Canterbury earthquakes. Shocks have a dampening effect that limits options and clouds public sentiment.
The revenue projections also don’t factor the implications from any tax policy changes that could flow from the Tax Working Group (TWG). In particular broadening the tax base to more comprehensively tax capital gains, which feels like will be taken to the next election.
Now, recognising that what’s projected will always flex with time, the outlook is generally pretty healthy. It provides the Government with choices including headroom to deal with a shock. While the Government has kept its powder dry in terms of some of the key destinations, it has signalled a material pivot to how it will measure success (being wellbeing) which includes addressing what it has coined social and infrastructure deficits.
Little is said about taxation, a traditional budget topic. The ongoing TWG deliberations allow the Government to avoid questions around tax cuts noting that they have been clearly signalled as not being a Government priority. So much so that no one even asked a question on this topic at the Budget lockup. Outside of R&D credits, the expectation is that the tax base will be broadened, not contracted, post the TWG deliberations.
The third leg of the revenue and expenditure trifecta is of course the balance sheet, and in particular the destination around core crown net debt. Other than signalling the planned reduction to 19.1%, slightly lower than what was foreshadowed as the 2022 target, there is no real clarity as to what the destination on this topic will be. None of this is a surprise. Why would the Government look to limit its options going forward when it doesn’t have to?
It’s an enviable and in some respects unprecedented position for a new Government. Having money to spend and popular things to spend it on. The hardest decisions were around who should get what. And the greatest disappointments were generally that those that got, didn’t get enough or what they wanted.
For taxpayers generally, they started receiving the first of many social and services dividends proposed by the current Government, including those intended to secure greater social cohesion; not necessarily a bad thing, including for business. Cash dividends by way of wide scale tax cuts are not expected to feature too prominently or be part of the current Government’s vernacular; consistent with Budget 2018. Putting this in a positive light, the Government doesn’t need to raise taxes to fund its initiatives, albeit that there is a clear expectation that visible tax changes will be taken to the next election.
As budgets go, the Minister had a much easier run than many of his global colleagues facing their first budget. He looked comfortable in his current role and there was no reason not to.
Thomas Pippos is chief executive of Deloitte New Zealand