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POLITICAL UPDATE - THE LABOUR-NZ FIRST BUDGET
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The Labour-NZ First-Green Government’s first Budget is designed to showcase a Finance Minister and Government that is fiscally conservative while at the same time responding to constituent demands. It is not transformational.

Treasury’s economic outlook is solid and with fiscal comfort.

Budget economic forecasts are upbeat about the economic outlook over the next five years, driven by an expectation that immigration will fall by less than previously assumed. Prices for New Zealand’s exports are expected to stay strong against a growing world economy.

Economic highlights

  • The operating allowance over the next three budgets is $2.8 billion on average. 
  • The new capital provisions are $3.8 billion for this financial year, $3.7 billion next year and $3.4 billion in Budget 2020. 
  • The major increase in government spending caused by the previously announced July 1 Families Package and other initiatives announced in the Budget are expected to underpin average annual growth of 2.9 percent over the next five years.
  • Economic growth is one of the reasons for higher tax revenue forecast over the next five years. 
  • Inflation stays at or below 2 percent a year. 
  • The current account deficit remains stable at around 3 percent of GDP.
  • Unemployment slips to 4 percent by 2020.
  • Treasury has adjusted its immigration projections. It forecasts annual net immigration (currently around 70,000 net per annum) to fall to 25,000 by 2022. An external agency forecast puts this at 40,000.

Detail

As foreshadowed, health and education are the Budget ‘winners’. While there is no direct reference to funding to meet state sector salary increases this is built into Budget contingency. It is the Government’s biggest Budget headache.

  • Health gets an operational spending boost of $3.2 billion over four years, of which $2.2 billion will go to the District Health Boards. It also gets $850 million for capital expenditure for this financial year: $750 million for pressing problems and $100 million which will be available on application to assist deficit strapped DHBs.
  • Free doctor visits have been extended to under 14s and subsidised visits to all community card holders, Housing New Zealand tenants and people receiving the accommodation supplement or income related rent subsidies. 
  • Education’s compulsory sector gets around $1 billion a year in each of the next four years for a school building package plus funding for another 1,500 teachers. Commentators are already asking where the teachers will come from.
  • There is funding to build 1,600 new state houses a year over the next four years, up from a commitment to build 1000 annually. Housing New Zealand will be able to borrow up to $2.9 billion from third parties and invest $900 million from its own operations to fund the building. This is seen as a bold ambition given the building sector’s capacity restraints. The Budget also reveals that bottlenecks in the construction industry means weak growth in residential house building over the next 12 months. Treasury has had to halve its forecast rate of progress on the government’s KiwiBuild affordable housing policy.
  • $198.4 million is set aside to accommodate an extra 600 prisoners in rapid-build modular units by the end of 2019 but a decision on a $1 billion rebuild of Waikeria prison is postponed suggesting it may be dumped.
  • There is $100 million for the Green Party to set up a Green Investment Fund to encourage private sector investment in low-carbon industries. Work on this is underway.
  • There’s $5 million over four years to enhance the Overseer farm management tool used by primary industries and regional councils to measure nutrient use and greenhouse gas emissions.
  • The Budget tasks the Productivity Commission to investigate impacts of disruptive technology along with an inquiry into local government funding and financing. 
  • New organisations:
    • A new unit to oversee Resource Management Act compliance is to be set up to improve consistency across councils
    • There’s a special tribunal to sort out Canterbury earthquake insurance disputes
    • In August consultations will begin to establish an independent fiscal institution to provide all political parties with non-partisan costings on their policies.

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Linda Clark2
Linda Clark

Special Counsel

Wellington

+64 4 915 0862

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