- The government has made a bold step forward in incorporating wellbeing measures. The change must be respected. It’s a long road ahead, however, and time is needed to succeed.
- Spending has been boosted across the Government’s key initiatives, taking from future (forecast) surpluses. The impact on net debt and gross debt issuance is small. The government stuck to the self-imposed fiscal responsibility objectives. These restraints need to be removed.
- The forecast fiscal impulse had disappointed this year, so was watered down and spread across the next two years. Government activities provide the lion’s share of forecast growth for the nation.
- Treasury’s forecasts were fair and easily defendable. They’re not too dissimilar from our own, or the RBNZ’s.
Grant Robertson proudly delivered his first well-being budget. A budget designed to encourage collaboration across Government departments, and refocus our attention of measurues that matter to our wellbeing. It is a very bold, interesting first step. A step that requires a few more, and needs time to cultivate success.
The key initatives in the budget were admirable. Tackling child poverty, and mental health are desperately needed. The focus on Māori and Pasifika development is important in lifting the standard of living for all Kiwis. The social side of the budget was well done. The overaching plan to transform and build a more productive economy lacks a little detail. But the examples of funding into rail and the regions showed promise.
The Finance Minister’s “whole of government”, “intergenerational” approach, using wellbeing measures to focus and measure success, is a big ask. Only time will tell, and we fear they may be tested in time. Moving the dial, meaningfully, on Kiwi wellbeing may take 5-10 years, and they’ll be quizzed every budget. The aspirations in the budget are grand, and respected. But it’s all about long-term execution in a short-sighted political world.
Fiscally conservative
The Government upped the spending as part of the first well-being budget, but keeping its powder dry for next year’s budget into the election. To do this the Government had to eat into previously forecast surpluses. Treasury’s numbers show that the Government is still set to run operating surpluses over the entire projection period. However, compared to the Half-year update, surpluses are forecast to be smaller, hitting a low of $1.3bn in the next fiscal year before rising to around $6bn in 2022/23.
Government’s operating spending in the current Budget is stronger than had been expected. For example, Budget 2019 decisions mean spending is around $5.4bn above what was expected at the Half-year update. Areas receiving much of the increased spending include the usual big budget items such as social welfare, health and education. Within social welfare the Government announced the indexation of main benefits by average wage increases. The indexation is part of the Government’s desire to reduce child poverty. Capital spending is broadly in-line with what was outlined roughly six months ago, $41bn over five years. Supporting surpluses, Core crown revenue is forecast to growth steadily over the forecast period. Rising wages and employment is expected to support growth in source deductions (largely via PAYE).
According to the Treasury’s fiscal impulse analysis, the impact on aggregate demand from fiscal policy is largely unchanged compared to the Half-year update over the forecast period. Disappointment in the current year has led the Treasury to shift impulse from this year to next. Nevertheless, fiscal policy will become a drag on aggregate demand from 2021 onwards. Unless next year’s budget uses the (pre-election) opportunity to stimulate a little longer.
Today’s Budget does allow the Government to keep its powder dry heading into an election year. Net debt as a percentage of GDP hovers around the 20% target over much of the forecast horizon, before easing to 18.7% in the final projection year 2022/23. The Minister of Finance had already announced a loosening of the Governments fiscal straight jacket, allowing the use of a target band for net debt to 15-25%. We would argue that the time is now to flag this unnecessary fiscal target borrow and invest more to address NZ’s infrastructure deficit, that has come about following recent rapid population growth.
Fiscal policy underpinns Treasury’s growth forecasts
Overall, the Treasury’s set of economic forecasts look believable, and are broadly similar to our view. Economic growth has cooled and is expected to fall further in the near-term before picking up. The Treasury is forecasting a lift in GDP growth to around 3% next year, in part due to a boost in Government’s operating spending in the near term. However, the Treasury seemed to dismiss the RBNZ’s recent cut to the OCR to 1.50%, which we think will be followed up by another cut most likely in August. Stimulatory monetary policy, in our view, will also support growth. The Treasury seems less convinced of the second cut. Current market pricing suggests that there is an increased chance that the RBNZ will deliver a third cut to 1% (50% probability in the market). The Treasury might be overstating the contribution to future growth from fiscal policy but understates monetary policy.
A key aspect of the Treasury’s forecasts is a rise in wage inflation. A tight labour market and rising adult minimum wage to $20/hr by April 2021 will lift wage growth. On the flip side, the rise in the cost of labour, is also likely to lift the unemployment rate. A profile shared in the Treasury projections which show a lift higher in unemployment rate to 4.3% by 2023.
Don’t forget Wellbeing
Despite all the distractions whirling around this Budget, at the heart of it was a new wellbeing approach to fiscal policymaking. The new measures seek to broaden the established focus on, and not always useful, economics measures such as GDP. Although, it has been known for decades that measure like GDP are limited in what they can tell you about the living standards of individuals in an economy – it’s not their intended purpose anyway. The first wellbeing budget is a bold move and must be commended, for it is well intentioned. It is a long-term approach to making fiscal decisions to address things that matter to Kiwis’ wellbeing. Only time will tell if budget measures improve our wellbeing. And we are short on time with the current political system and a three-year election cycle.
The current wellbeing approach was informed using analysis from the Treasury’s Living-Standards Framework (LSF). The LSF has informed some of the key spending decisions of today’s Budget such as new mental health services, and funding of specialist services to address family and sexual violence. The Treasury’s LSF dashboard is worth a look, based on detailed surveys of NZ’s wellbeing based on various domains (such as health, income and cultural identity). There is no logical single measure of wellbeing, what is important to one person’s wellbeing is not necessarily important to someone else. The Treasury’s dashboard confirms a number of previously believed aspects of NZ life. For instance, by family type, sole parents do it far tougher than the rest. By ethnicity, Māori and Pacific people fall behind in housing and income. Asian Kiwis lack cultural identity but have significantly exceed the rest of the population when it comes to wellbeing from knowledge and skills.