BUDGET 2015: a word of warning on new regional GDP growth figures

The first in NBR ONLINE's series of expert previews in the buildup to Budget 2015. Click the "Budget 2015" tag at the end of this article to see all Budget 2015 articles, or to add Budget 2015 to your MyNBR tags - Editor.

The latest regional GDP growth figures just released by Statistics New Zealand reveal that we all need to strap ourselves in for what could be a sensational ride over the next few years.

Seldom, if ever, has New Zealand seen such widespread and strong growth with Southland (11%), Canterbury (10.6%), Waikato (10.1%) and Taranaki (7.2%) putting the regions well ahead of the larger centres of Auckland (5.1%) and Wellington (4.4%). The overall growth for New Zealand was 6.7% for the year to March 2014.

Staggering? Yes. Sustainable? Highly unlikely as this latest regional data is for the year ended March 2014 and a lot has happened to the New Zealand economy since then. The two  key impacts are falling milk prices and drought conditions across several parts of the country, including Canterbury, South Canterbury, North Otago, Marlborough, Wairarapa, and southern Hawkes Bay with a watch on the Waikato.

According to the Reserve Bank’s comment on its March 2015 official cash rate decision, the recent fall in dairy prices and this summer’s drought are downside risks for the economy and combined are estimated to have shaved roughly $6 billion off farm incomes for the current season. 

The Reserve Bank is also concerned that while farmers used the high prices over the past few seasons to both pay off debt and build up cash reserves, there is a risk the drop in incomes will have a sharper impact on activity than expected.

So what could be worked into Budget 2015 to address the issue? Irrigation. It is one of the cornerstones of the Government’s growth policy. This summer’s dry spell and drought conditions is a timely reminder that global warming is becoming a major concern, and let’s not forget that dry years can be followed by similar climatic weather patterns the following year.

In the 2011 Budget the Government allocated $35 million over five years to June 2016 to support the development of irrigation infrastructure proposals to the stage where they are investment ready. Up until September 2014 the Irrigation Accelerator Fund (IAF) had given grants totalling $27.5 million with the Hunter Downs scheme in South Canterbury being the main recipient with $7.7 million.

In July 2013, the Government signalled its plans to invest $400 million to accelerate the development of irrigation through Crown Irrigation Investments. This is a good start, but for the country to fully reap the benefits of our amazing growing conditions and proximity to the two major population centres of the world, China and India, then more needs to be done to support large scale regional irrigation and agricultural projects which will benefit New Zealand immensely.

Twin benefits
An investment in large-scale irrigation would continue to spread growth across New Zealand and contribute to a lift in agricultural production, which boosts farm gate returns. This additional production draws in additional inputs such as agri services and transport, and the extra on-farm volumes also lead to more activity in the primary processing sectors. 

A boost in Government investment in large-scale irrigation and agricultural projects will have twin benefits for New Zealand – regional growth and higher regional employment along with lower housing pressures in Auckland and Christchurch and encouragement for immigration to focus on other centres.

New Zealand has the opportunity to become the food bowl of Asia. Irrigation, encouraged inside strict controls and guidelines, is key.

Eugene Sparrow is a partner, privately held business, at Grant Thornton New Zealand, chartered accountants and business advisers.