Zero to hero in four years

The Budget spells out a programme of new and continuing spending including $1 billion for “modernising and transforming  schools,” $12 billion on state highways over 12 years, $76m for a new technology institute, $4.6 billion Transpower upgrade of the national grid, $1.35 billion rollout of the ultrafast broadband, $300 million for rural broadband, a $385 million increase in science and innovation and $287 million to reduce welfare dependency over 4 years.

So where is all the money coming from?

The government will continue to borrow and spend. Government borrowing was $10 billion in 2008. That has now increased to $50 billion and is projected to peak at $70 billion – $1600 for every New Zealander by 2015.

The government deficit for the year to 2012 will be about $8.4 billion dropping slightly to $7.9 billion for 2013 and further to 0.42 billion in 2014, before culminating in a modest surplus in  2015.

Meanwhile, the economy is projected to grow at just 2% this year and up to 3% in the year to 2015.

But little of this is expected to bring any direct benefits for those people in the low income sector of the economy who are already receiving welfare pay outs.

Unlike Greece, though, which has had to make deep cuts into its social sector, New Zealand does have choices – and these show in that there is no reduction in superannuation, no hike in company or personal taxes and no wholesale reduction or removal of social welfare support for those who need it.

There is, however, a continued focus on reducing and removing spending programmes with no measurable outputs.

Major risks continue

There is continuing reliance on the export sector to drive projected growth. There is both export price risk and exchange rate risk. The recent reduction in milk prices is a big concern.

The recent weakening against the greenback does provide relief and a much-needed boost to the export sector as 75% of the country’s exports are priced in US dollars.

The Christchurch earthquakes will continue underpinning the country’s growth in the next two years. The risk is that further significant quakes could halt or delay the rebuild.

Business confidence is still veering toward the negative. Businesses will be providing the new jobs projected to be 154,000 over the next 4 years and will only take on new employees when they are comfortable.

Interest rates are at a 30-year low but if they increase significantly this will slow growth.

The government borrowing presupposes that there are other parties, both foreign and local, that will lend more and roll over maturities till the time when it can commence repayment from 2016.

If the treasury growth figures of 2% rising to 3% do not play out as expected, this will cause cost and revenue  problems.

A credit downgrade risk will remain strong until government debt reduces which will only happen after the projected return to surplus in 2015 to 2016.

While there is no slash and burn, there are few signs of austerity in this budget. The social welfare system remains fully funded and in place although fresh spending is focused on helping people off welfare dependency and into jobs.

Growth will only come from the private sector and with the continued spend of the government in excess of its income the stimulus continues for the private sector to take advantage of.

Further enquiries, please contact:

Peter Sherwin
Partner, Privately Held Business
T +64 (0)4 495 3777
E Peter.Sherwin@nz.gt.com