Economic week

December 15, 2017
A ‘Mini Budget’
The Minister of Finance released the Budget Policy Statement, which sets out the Government’s fiscal priorities for Budget 2018.  It became something of a mini-budget with a raft of spending announcements, including its Families Package, tertiary education package, and winter energy payment.  The previous government’s tax cuts were confirmed for the chop and the saving will help fund these initiatives.

Over the next four Budgets, operating allowances provide for $21.7 billion of new expenditure, and capital allowances provide for $12.6 billion of new investments.  These allowances are over and above the costs of the 100-Day Plan, which were included in the Half Year Economic and Fiscal Update.  

The commitments in the Labour-NZ First coalition agreement and the Labour-Greens confidence and supply agreement beyond the 100-Day Plan amount to $15.1 billion.  This leaves $6.6 billion of uncommitted new spending over the next four years.  This is not as much as it seems as the amount is cumulative – around $660 million per year – and apparently less than what the previous government was forecasting in new spending.  

The forecasts do not leave much room for extra spending initiatives or for public sector pay settlements so either the Government will be very frugal from here on in or it will make upward adjustments in those allowances.  Hopefully for its credibility it will be the former.  

To help cement its credibility the Government enshrined the five ‘Budget Responsibility Rules’ the Labour Party campaigned upon.
• Deliver a sustainable operating surplus across an economic cycle.
• Reduce the level of net core Crown debt to 20% of GDP within five years of taking office.
• Prioritise investments to address the long-term financial and sustainability challenges facing New Zealand.
• Take a prudent approach to ensure spending is phased, controlled and directed to maximise its benefits. The Government will maintain its expenditure to within the recent historical range of spending to GDP ratio.
• Ensure a progressive tax system that is fair, balanced and promotes the long-term sustainability and productivity of the economy.

At the same time as the Budget Policy Statement, the Minister also released Treasury’s Half Year Economic and Fiscal Update.  The HYEFU takes account of the Government’s spending and revenue for the remainder of the year and forecasts over the next few years.  It takes account of commitments from the Government’s 100-Day Plan.  

Economic forecasts:
• Real GDP growing 2.7% in 2017, rising to 2.9% in 2018 and 3.6% in 2019 before easing back to 2.1% in 2022.  
• Unemployment rate to fall from 4.8% in 2017 to 4.1% in 2022.
• Inflation rate to edge up from 1.7% in 2017 to 2.2% in 2022.
• Current account deficit to drop from 2.9% in 2017 to 2.3% in 2019 before climbing to 3.9% in 2022.

Fiscal forecasts:
• Core Crown expenses will rise slightly from 28.0% of GDP in the 2016/17 year to 28.5% in 2017/18 and will stay relatively stable thereafter
• Crown operating balance before gains and losses will fall from 1.5% of GDP in 2016/17 to 0.9% in 2017/18 and 2018/19 before rising to 2.5% in 2021/22.
• Net core Crown debt will reduce slowly but steadily from 21.8% of GDP in 2016/17 to 19.3% in 2021/22.

With economic growth having a major influence on tax revenue, a lot will depend on whether the optimistic economic forecasts are met.  A shock or even just a slowdown would put the Budget Responsibility Rules to the test.  

Initiatives like the Families Package, winter energy payment, higher student allowances and first year free tertiary study, plus higher wages, driven by moving to a $20 per hour minimum wage will push up consumer spending and domestically driven economic growth.  But they could also push up inflation, interest rates and the exchange rate, harming productivity and competitiveness, especially in the export sector.  Before writing this off as doom-saying this is exactly what happened in the mid-2000s prior to the Global Financial Crisis.

Reserve Bank Governor
It was a busy week for the Minister of Finance with his announcement of the appointment of Adrian Orr as the next Governor of the Reserve Bank.  

Adrian Orr has a very impressive track record.  He has been CEO of the NZ Superannuation Fund since 2007 and prior to that he was a Deputy Governor of the Reserve Bank from 2003 to 2007.  He was Chief Economist at Westpac from 2000 to 2003 and Head of Economics at the Reserve Bank from 1997 to 2000. Earlier in his career he held roles at the National Bank, Treasury, OECD and NZIER.

Grant Robertson made it clear he wants a Governor who can lead the Reserve Bank through the Government’s monetary policy reforms.  The Reserve Bank Board has delivered someone who is likely to be willing and able to achieve this while importantly retaining the confidence of the markets.  Indeed, the NZ Dollar appreciated on the news of Mr Orr’s appointment.

Mr Orr will take up his new role on 27 March 2018 and he will sign a new policy targets agreement with the Minister.

Agricultural Census
Statistics NZ has released provisional results from the 2017 Agricultural Production Census, which was completed by more than 52,000 farmers and growers.  Comparing June 2017 to June 2016 there were:
• 27.37 million sheep, down 0.8%
• 6.47 million dairy cattle, down 2.2%;
• 3.61 million beef cattle, up 2.1% – the first annual increase since 2006.
• 849,500 deer, up 1.7% – the first annual increase since 2004.
• 913,100 tonnes of grains harvested from 108,600 hectares, down 16.7% and 16.9% respectively.

The final census results are due out in May 2018.

Food Price Index
Lower prices for fruit and vegetables pushed food prices down in November, according to Statistics NZ’s monthly Food Price Index. 

On a monthly basis food prices were down 0.4% compared to October (down 0.1% when seasonally adjusted).  
• Fruit and vegetable prices were down 2.6% (but up 1.2% when seasonally adjusted); 
• Meat, poultry and fish prices were down 1.0% (beef & veal down 2.9% and lamb, mutton & hogget up 2.1%); and 
• Grocery food prices were up 0.6% (bread & cereals up 0.8% and milk, cheese & eggs up 0.1%).

On an annual basis food prices were up 2.3% compared to November 2016.  
• Fruit and vegetable prices were up 6.4%; 
• meat, poultry and fish prices were down 0.2% (beef & veal 2.0% and lamb, mutton & hogget up 10.4%); and 
• grocery food prices were up 2.4% (bread & cereals up 0.1% and milk, cheese & eggs up 3.6%). 

Exchange Rates

Source: Reserve Bank of NZ

Wholesale Interest Rates

Source: Reserve Bank of NZ