New Zealand: Government presents 2014 budget
May 15, 2014
On 15 May, the government announced the budget for FY 2014, which ends in June 2015. According to the document, New Zealand will return to a core operating surplus (OBEGAL)-excluding investment gains and losses-of an estimated NZD 0.4 billion or 0.2% of GDP, which is up from the NZD 2.4 billion deficit (equivalent to 1.1% of GDP) estimated for the current fiscal year. In addition, the government affirmed its commitment to achieve a fiscal surplus of NZD 1.3 billion by the end of FY 2015 (ending June 2016) and projects that by 2020 net core crown debt will drop to 20.0% of GDP.
In the draft budget, the Treasury pointed out that growth prospects are positive for the coming years and that it expects that this will translate into increased tax revenue. In particular, the government projects the economy to grow 3.0% this year before increasing to a 4.0% peak in 2015 and then decelerating to 3.0% in 2016. Against this backdrop, the Treasury expects total revenues to increase by 0.6 percentage points in FY 2014 to approximately 39.6% of GDP, while it plans to decrease total expenses by 0.7 percentage points to approximately 39.3% of GDP. In addition, even though the Treasury kept new operating spending at NZD 1.0 billion in the 2014 budget, it will be increased to NZD 1.5 billion in the 2015 budget and rise by 2.0% per year thereafter. New spending will be directed to several areas including education, health and welfare, among others. Some of these measures include an extension of the parental leave scheme, an increase in early-childhood funding and increased funding for the community housing sector. Regarding revenues, the Treasury plans to increase tax compliance by giving additional funding to Inland Revenue. Moreover, the duty-free tobacco allowance will be reduced, while duties on some imported building materials will be stopped temporarily and criteria for R&D tax deductions will be less restrictive.
In the draft, the government underlined that rebuilding Christchurch remains at the center of the government's plans, and that the government will cover a significant share of the reconstruction costs, which are estimated to total NZD 40.0 billion. Moreover, regarding the 2014 budget's impact on monetary policy, the Treasury noted that, “relative to a neutral stance the Government's fiscal stance is expected to remove inflationary pressure over the next four years, such that the Official Cash Rate (OCR) will be around 50 basis points lower than otherwise by 2018.”
FocusEconomics Consensus Forecast panelists are broadly in line with the government and expect the fiscal deficit to be 1.0% of GDP this year. In addition, participants expect a fiscal surplus of 0.1% of GDP in 2015.
Author: Armando Ciccarelli, Head of Data Solutions