Flat wages, inflation lean on state books with slimmer tax take

New Zealand's tepid inflation and lack of wage growth will lean on the government's books over the next couple of years, with a slimmer tax take than previously thought.

The Treasury expects the Crown's operating balance before gains and losses (obegal) will slip back into deficit in the 2016 financial year before returning to smaller surpluses than earlier forecast as a taxes fail to pick up in an environment where a slump in oil prices and a persistently strong kiwi dollar keep inflation stagnant, and falling commodity prices and slowing global growth look likely to slow the local economy.

After  an operating surplus in the 2015 financial year, Finance Minister Bill English has changed his fiscal priorities to focus on maintaining surpluses over the forecast horizon to generate a cash buffer, and reducing net debt to 20 percent of gross domestic product by 2020 and between zero-and-20 percent in the medium term.

"The books are broadly in balance – so in the immediate future we will not distinguish between forecasts of a small negative or small positive obegal," Mr English said. "This does not signal a change in direction – we will continue to focus on keeping a tight rein on spending, running surpluses and paying down debt."

Mr English's other new priorities include implementing a new funding policy for the Accident Compensation Corp after its recent levy cuts, cutting income taxes from the 2017 budget if conditions allow, and using any spare funds to reduce debt faster.

The Treasury projects the Crown will post an obegal-deficit of $400 million in the year ending June 30, 2016, having previously forecast a surplus of $200 million. It will return to a $400 million surplus in 2017, before rising to $4.9 billion by 2020.

That's largely due to a slower increase in the forecast tax take of $68.4 billion in 2016, rising to $84 billion by 2020. The smaller increases are expected to largely come from income tax, GST, and resident withholding tax.

The reduced tax take will lead to a slower decline in the cash deficit than previously thought, with a shortfall of $5.4 billion seen for 2016, before turning a surplus of $500 million in 2019 and $1.9 billion in 2020.

In turn, that sees net debt stay higher than previously predicted, peaking in 2017 as a percentage of GDP at 27.7%, or $70.7 billion, before falling to 24% of GDP, or $71.1 billion in 2020.

The Debt Management Office increased its bond issuance programme by $6 billion over the forecast horizon, due to "a higher funding requirement beyond 2015/16." The office will sell $8 billion of bonds in 2015/16, and $9 billion in each of the next four years, for a net issuance of $12.6 billion over the five-year period.

Mr English told a briefing in Wellington the Future Investment Fund, which held the proceeds from the partial privatisation of the government's power companies, had been fully used, and said an extra $1 billion will be allocated for capital spending in the 2016 budget.

"We think it's an appropriate time to get on with capital investments," he said. "We're willing to incur a bit more debt as the future investment fund runs out and we have a pipeline of sound investments propositions."

Those investments include several of Christchurch city's downtown anchor projects, public-private partnerships for new schools and Inland Revenue's overhaul of its IT system.

That will help provide a positive fiscal impulse to the economy in 2016, before ongoing cuts in operating expenditure and reduced capital spending will drag on growth.

"The fiscal impulse indicator shows discretionary fiscal policy is expected to have a contractionary impact on demand on all but the first year of the forecast horizon and to be broadly neutral on average," the Treasury said in the half-year economic and fiscal update.

The Treasury forecast the Crown's net worth rising to a pre-global financial crisis level of $107.2 billion by 2020, from $86.5 billion in 2015. The largest growth in assets is expected to come in social assets such as schools, hospitals, and social housing.

(BusinessDesk)