Economic week

May 26, 2017
by Nick Clark

The main feature of the week was Steven Joyce’s first Budget. 

No one would have been surprised by the Budget’s focus on spending on public services, social investment, and infrastructure, with some tax and spending initiatives targeted at lower and middle income families. 

Solid economic growth and fiscal discipline has turned around a ‘decade of deficits’ forecast in 2008 to surpluses which are projected to strengthen over the coming years.  The forecast surplus for the current 2016/17 year is $1.6 billion, rising to $2.9 billion for 2017/18 and then growing steadily to $7.2 billion in 2020/21.

The Government has four fiscal priorities:
• Maintaining rising operating surpluses.
• Reducing net debt to around 10-15 percent of GDP by 2025.
• If economic and fiscal conditions allow, beginning to reduce income taxes.
• Using any further fiscal headroom to reduce debt.

These four priorities are consistent with Federated Farmers’ fiscal policy position.  In addition, we believe that Government spending should be contained so it reduces to below 30 percent of GDP (now achieved at around 29 percent) and it should be focused on things that will improve productivity and competitiveness and provide strong value for money.

In terms of ‘new initiatives’, the Budget is providing that over the next four years there will be an additional net $8.6 billion in operating spending initiatives and a net $4.0 billion in capital spending initiatives.

Operating spending will grow steadily over the next four years, from $77.5 billion in 2016/17 to $89.2 billion in 2020/21.  This almost the same rate of growth as nominal GDP.  This means operating spending as a percent of GDP will fall only slowly from now to 27.5 percent in 2020/21.

Budget 2017 provides some tax relief but it is restricted to adjusting the lower income tax thresholds from 1 April 2017 combined with changes to family tax credits and accommodation supplements.  

However, we’re disappointed there was no movement in the threshold for the top rate of income tax or for the company tax rate.  Too many taxpayers will continue suffering the effects of several years of fiscal drag and our company tax rate runs the risk of falling behind those overseas.

In terms of the primary industries, there is additional spending for MPI on biosecurity, irrigation, and trade facilitation.  These are all important priorities for farmers.

We welcome an increase in science and innovation spending but would have preferred more emphasis on building our science capability across the country, particularly in biological and environmental sciences, rather than going to companies for commercialisation. 

MFAT gets more funding for trade negotiations and international presence, and there is also more funding for tourism infrastructure, transport and police, all of which are welcomed.

Looking ahead, surpluses are forecast to grow.  As was the experience from 2005 to 2008 the temptation to spend more will grow in tandem.  

Whoever wins the September election will inherit a healthy set of books but they could easily be squandered if there is a spending spree followed by a shock (as happened in 2008).   

The temptation to spend up needs to be guarded against.  Better perhaps for the Government to have moved more on taxes so reducing the headroom for even more lavish spending promises!

Turning to other economic news, April was a bumper month for exports, according to Statistics NZ’s monthly Merchandise Trade Statistics.

For the month of April exports were $4.8 billion, up $423 million (9.8 percent) on April 2016.  Exports of milk powder, butter and cheese were $1,016 million, up $289 million (35.4 percent), while meat exports were $630 million, up $6 million (1.0 percent).  Forestry and wine exports were also up strongly but wool exports slumped 45 percent to just $38 million for the month.

April imports were $4.2 billion, up $194 million (4.9 percent), resulting in a monthly trade surplus of $578 million.

For the year ended April 2017, exports were $49.1 billion, up $90 million (0.2 percent) on the previous year.  Exports of milk powder, butter and cheese came in at $11.8 billion, up $617 million (5.5 percent), while meat exports were $6.0 billion, down $625 million (9.5 percent) and wool exports of $554 million were down $252 million (31.3 percent).

Annual imports were $52.6 billion, down $27 million (0.1 percent), resulting in a trade deficit for the year of $3.5 billion, down slightly on the previous year.

Fonterra this week delivered some good news for dairy farmers, lifting its current season payout and making positive noises about next season’s too. 

Firstly, Fonterra revised its 2016/17 milk price to $6.15 per kg milk solids, up from $6.00. Combined with a likely full year dividend of 40 cents per share, this will give fully shared-up farmers a forecast cash payout of $6.55.

Fonterra also forecast an improved milk price of $6.50 per kg milk solids for the upcoming 2017/18 season. If two years of $6 plus payouts come to pass this should restore most to profitability and take some of the pressure off after extremely difficult 2015 and 2016 years.

April’s tourism and migration flows continued at record levels, according to Statistics NZ’s monthly International Travel and Migration Statistics.

In the April 2017 year, there were 129,800 migrant arrivals, a new annual record, while migrant departures were 57,900. This meant that 71,900 more migrants arrived than left.

Meanwhile, visitor arrivals for the April 2017 year numbered 3.6 million, setting a new annual record. The April 2017 annual total was up 10 percent from the April 2016 year.

Exchange Rates

Source: Reserve Bank of NZ

Wholesale Interest Rates

Source: Reserve Bank of NZ