Spending wins over tax cuts; big ticket items get boost

Income tax cuts are on hold as the government says "responding to the earthquakes and reducing debt are currently of higher priority", although election year tax sweeteners remain possible.

Today's Budget Policy Statement shows a government sensitive to polling that suggests public appetite for spending increases on public services and debt reduction is preferred over tax cuts as the best way to use the massive budget surpluses that are forecast over the next four years.

"The Half Year Update does not make an explicit provision for tax reductions, but the government will continue to consider options for lower rates or thresholds, either in Budget 2017 or after, as the fiscal situation continues to improve," Finance Minister Bill English said in the BPS.

The text was finalised last Friday, before Prime Minister John Key announced his unexpected resignation on Monday, and reflects late redrafting to deal with the $1 billion estimated net impact of last month's Kaikoura earthquakes on the Crown's accounts.

The largest single change from the 2016 Budget is a more than tripling in provision for new capital spending.

"The capital allocation for Budget 2016 has been increased from $900 million to $3 billion in Budget 2017 and to $2 billion in future budgets to provide for a number of high-quality infrastructure and investment projects."

Of that $3 billion for next year, only $1.7 billion has been allocated so far and neither the BPS nor the Treasury's Half Year Fiscal and Economic Update document gives precise detail about the new public assets those funds will help build, beyond the $1.4 billion to cover the cost of the Auckland central rail loop project.

"Net investments of $11.1 billion are forecast, and largely represent capital injections to Crown entities to maintain and expand their asset bases," the HYEFU says, at a rate of $1.9 billion to $2.8 billion annually.

"The largest capital injections across the forecast period are to the New Zealand Transport Agency for state highways ($7 billion). Capital injections to district health boards, Crown Fibre Holdings, Southern Response and Otakaro (the latter two relating to the Canterbury rebuild) are also included."

A special note on the impact of high immigration identifies pressure as greatest on education, health, and transport infrastructure from adding an estimated 371,000 new citizens over the nine years from 2012 to 2021.

While inward migration is, however, seen moderating over the next five years, it falls more slowly than presumed in the May budget, with some 66,000 more people expected over the next five years than the earlier forecast.

The reduction is driven by a combination of fewer international students arriving because of closer visa policing, more departures for jobs in a recovering Australian economy, and higher hurdles recently introduced for new migrants.

The HYEFU capital expenditure forecasts show the largest single area of new capital spending through the next five years is a cumulative forecast $9.5 billion on education assets, followed by the $7 billion for NZTA, $3.1 billion for the New Zealand Superannuation Fund when contributions resume in 2020/21, and $2.5 billion on defence spending.

A further $6.2 billion of capital expenditure is unallocated.

(BusinessDesk)