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A taste of Newsroom Pro from Budget day

Newsroom Pro is Newsroom's twin publication - an online subscription news service based in Wellington, reporting on politics, business and the economy from around the Beehive.

The Newsroom Pro team is headed by Bernard Hickey and publishes news, analysis, commentary, and information throughout the working day for subscribers to the site. Newsroom Pro's reporters and editors in the Parliamentary Press Gallery include Foreign Affairs and Trade Editor Sam Sachdeva, National Affairs Editor Shane Cowlishaw, Sub Editor and Photographer Lynn Grieveson and Reporter Thomas Coughlan. Their analysis and exclusives are published first on Newsroom Pro, along with weekly columns from Rod Oram, Richard MacManus, Peter Dunne and Bryce Edwards.

Part of the daily offering is Newsroom Pro's 8 things email, an essential roundup from Bernard of what's in the news right now, what's coming up, and where the team may be setting their sights next.

Non-subscribers can read up to five articles a month on Newsroom Pro for free. Individual Newsroom Pro subscriptions are available here for NZ$29.00 per month incl GST.
Email Bernard Hickey (bernard.hickey@newsroom.co.nz) for corporate and group subscriptions, which also include access to Newsroom Pro's full media monitoring and news release distribution service. This is an email-based targeted news release and information service aimed at corporate relations, public relations, public affairs and business development specialists. It is for our enterprise-wide clients. That service also includes the immediate publication of BusinessDesk's full file of economic, corporate and business coverage.

Newsroom Pro also produces special news emails on major news days, including this one below we put out for Budget 2018 on May 17. We were all in the Budget lock-up room in the Beehive and put this email out shortly after the above picture was taken. It included my introduction and the most comprehensive coverage of the Budget within an hour of its release. It included detailed analysis in 18 articles, which are all below.

Budget 2018 special: Tighter than it looks

By Bernard Hickey

Grant Robertson has delivered what appears to be a big-spending first budget, but a closer look reveals he has stuck to his rules about debt and surpluses.

The Labour-led Government has put off big capital expenditure decisions by delaying a $1 billion prison at Waikeria and kicking the Orion replacement spending down the track.

It delivered big health, education and housing spending as expected, but has used extra borrowing by Housing New Zealand Corp and Crown Infrastructure Partners to help it fund the capital expenditure needed in housing. But even with that off-balance-sheet borrowing, net debt is still only 20.1 percent of GDP by 2021/22.

The Government could have done a lot more to be truly transformational in housing, Auckland infrastructure and health if it had decided not to abide by its plan to run surpluses and reduce net debt to 20 percent of GDP by 2021/22. Meanwhile, the 10 year government bond yield was 2.83 percent in late afternoon trade. It represents the biggest wasted opportunity in a generation.

See all the details in our full coverage below, including Rod Oram's view that it is more of a patch-up job than a transformation. Shane Cowlishaw reports on the prison delay and immigration budget increases, while Sam Sachdeva reports on the Orion decision and RNZ remaining in limbo. Thomas Coughlan reports on the big budget boost and an increase in Labour state house building plans, although not by as much as Phil Twyford wanted.

For the first time, we also feature BusinessDesk's excellent budget coverage on the impact on the construction sector, the borrowing programme, the expected cost of the R&D tax credits and the risks from Mycoplasma bovis.

Budget 2018 tighter than it looks

By Bernard Hickey

Everything is bigger at first sight in Grant Robertson’s first full Budget.

The Finance Minister has forecast a bigger surplus, 1500 more teachers, an extra $3.2 billion in health spending and 1800 more state houses than Labour promised in the election campaign. That looks like a big spend-up.

But a second look reveals a Government that has actually stopped itself from spending significantly more on both ongoing operational spending and new capital projects. That’s despite saying it has uncovered infrastructure deficits since it was sworn in last year, and its own forecasts showing it will fail to reach its unemployment target and that it is nowhere near over-heating the economy.

The Labour-led Government’s first Budget has a close eye on its self-imposed budget restraints aimed at dragging net debt below its arbitrary target of 20 percent of GDP within five years of taking office. It has actually left itself plenty of spare room for hiccups or slowdowns, with Treasury forecasting net debt to be 19.1 percent of GDP.

A more forensic look at Budget 2018 shows it actually isn’t pumping much more stimulus into the economy than what was announced back in the ‘mini-Budget’ in December.

Treasury’s measure of fiscal stimulus to the economy shows the various changes announced in the full Budget are broadly neutral. There’s actually been a slight tightening in 2017/18, although the Government can’t be blamed for that. The weather was a factor that drove up taxation’s share of the economy.

There is a slight loosening of policy in 2018/19, but the the Government is actually still tightening policy in 2019/20 and 2021/22.

There is a cost to not pushing the economy harder. Surprisingly, given the Government has a formal policy of reducing unemployment below four percent, Budget 2018 only actually stimulates spending enough to get unemployment down to a trough of 4.1 percent. It starts rising again in 2021/22.

The numbers of people unemployed barely fall, with a fall to 117,000 forecast by mid 2019 from 125,000 now. It even starts rising again to 124,000 by 2021/22.

Robertson said in his Budget lock-up news conference the Government wanted to keep some of its powder dry to deal with the financial fallout from mycoplasma bovis, which Agriculture Minister Damien O’Connor has estimated could cost up to $1 billion.

But the Government’s response to Auckland’s population-shock-induced infrastructure and housing crisis has been limited by the 20 percent debt target and it has scrimped on a few other big capital spending items.

The Government has delayed a $1 billion decision to build a new prison at Waikeria. Instead, it will use 600 temporary shelters. It has also held off on making a multi-billion commitment to buy replacements for its 50-something-year-old Orion marine surveillance aircraft.

Budget 2018 Highlights

Grant Robertson unveiled a forecast surplus in 2018/19 of $3.6 billion, up from $3.1 billion in the just-ending 2017/18 financial year. Treasury sees the surplus rising to $7.3 billion by 2021/22, which will push net debt down to 19.1 percent of GDP. That’s well inside the Government’s key budget responsibility rule target of being below 20 percent within five years.

The Government is forecasting unemployment will bottom out at 4.1 percent in 2020 and the number of unemployed will go no lower than 117,000 in 2020. That’s barely below the 125,000 seen at the end of the current 2017/18 year and the current 4.5 percent rate.

It is forecasting inflation will take another three years to get to the 2.0 percent of the Reserve Bank’s one-three percent target band.

The Budget looks like a big loosening of fiscal policy with big licks of new spending for teachers, DHBs and special education, but the Treasury’s figures show a broadly neutral ‘fiscal impulse’ for the economy compared with the December half yearly update. In the short term, there has actually been a tightening of fiscal policy this year as some capital spending is shifted further out. There’s also still a tightening in 2019/20 and 2021/22 “driven by declining capital spending and rising tax receipts as a percentage of GDP.”

Phil Twyford partially won his Cabinet bid to increase the number of new state house builds. Labour promised an extra 1000 homes a year for for the first three years, but Tywford wanted Cabinet to double that. Instead, Budget 2018 delivers funding for around 1600 per year for the next four years. There’s also an extra $142.5 million over four years for grants for low income home owners to insulate and heat their homes.

Statistics New Zealand will get a funding boost to increase the size of the Household Economic Survey to 20,000 households from 3500 to get a better measure of child wellbeing and low income.

Despite the discovery of substantial infrastructure deficits in health, education and transport since the Half Yearly Update in December, the Government will be borrowing just $1 billion extra through its borrowing programme over the next four years.

Building a foundation, or a patch-up job?

By Rod Oram

Foundations for the Future is the title Finance Minister Grant Robertson has given his first Budget.

But Patching up the Past best describes how he and the Labour-led coalition Government will be spending almost all their time and money in coming years.

The Budget devotes large sums to improving in conventional ways health, education, infrastructure, housing, technology and other vital areas after years of under-investment. Hopefully that will help make many individuals, communities and companies slightly better equipped for and more eager to contribute to big change later.

But there are no new initiatives for achieving the “transformation” Prime Minster Jacinda Ardern is promising for society, the economy and environment. The only guides are the big but skeletal ones already promised such as a Zero Carbon Act, an Independent Climate Commission and lifting the country’s spending on research and development from 1.3 percent of GDP to two percent within 10 years.

Rather than breaking ground for the foundations of a 21st century country, the Government has so far only spray-painted a few dashed bright lines in eye-catching colours.

Worse, the Budget offers a muddle of miniscule sums of new money to further the work, such as $8.9 million over four years for the entire climate change policy framework; $2.2m to establish the Climate Commission; and $3m for our diplomats leading work in the Paris climate agreement on areas crucial to us such as international carbon credits and rules on forestry and land use changes.

Yet, the Government knows the vast scale of the challenge to turn our low-value, low productivity, unsustainable economy into a valuable, deeply sustainable one; and to do so in ways that offer a “just transition” for everyone, as the Prime Minister promised in her speech in Berlin last month.

Moreover, the Productivity Commission recently offered some 500 pages of analysis and detail on our potential pathways to a net zero emission economy by 2050, as this column described.

The Budget, however, offers only tiny band-aids for the old economy. The most glaring example is the primary sector: a bit more money for biosecurity in the face of mycoplasma bovis, our gravest biosecurity breach yet; for the Sustainable Farming Fund; for catching up on the backlog of fisheries applications; and for the Environmental Protection Authority which is tasked, among other things, with regulating our oceanic Exclusive Economic Zone, the fourth largest in the world.

Most remarkably, the Budget allocates a mere $5m over four years to improve Overseer, the software modeling system that farmers control the nutrient flows on their farms to minimise their pollution of waterways. The money is to “significantly increase the range of New Zealand farms systems covered by Overseer.”

But Overseer is an elderly platform developed piecemeal and slowly by AgResearch with government support over many years. Yet the Government and local councils keeping heaping new environmental management tasks on it. This is akin to a small, slow-moving software developer trying to evolve a late-1990s version of Microsoft Windows into a cloud computing platform.

In a similar vein, the Budget allocates $3.1m over four years for establishing a new unit in government to oversee compliance with the Resource Management Act and to improve consistency of application across local councils.

But the Government is absent from the real debate about the RMA. This is about what new legal framework should replace the nearly 30-year old legislation to ensure we more effectively and sustainably use our natural resources. There is a parallel debate on the need for massive reforms of our equally inadequate fisheries management system.

Work on both reforms is being led by the Environmental Defence Society, with backing from the likes of the Law Foundation and the Resource Management Law Association. Details of the RMA work are here.

Theoretically, the Government’s Green Investment Fund and the Provincial Growth Fund could evolve into useful sources of investment in a clean, high tech economy.

But the former has a vast amount to learn about its field before it can justify funding as a big investor; and the latter has a massive evolution to make from its pre-occupation with planting trees and supporting old economy initiatives.

Beyond the primary sector, the Budget reiterates the switch back to R&D tax rebates initiated by the previous Labour government but replaced by its National successor with targeted grants.

As we were starting to see last time around, rebates encourage a much broader range of companies to get serious about R&D. Hopefully, the good growth of tech sectors over the past decade will encourage an even bigger response this time.

Nonetheless, the Government will have to think, and fund, far more radically to drive a bigger investment from companies so the country lifts its R&D spend from 1.3 percent to two percent of GDP over the decade. But even that would only get us into the middle of the pack of developed countries.

The rapidly accelerating rate of technological change is already triggering big shifts in skills and work. Given this was a subject Robertson devoted a lot of effort to when Labour was in Opposition, it’s surprising we’ve seen little yet from the new Government in this field.

The Budget, however, did deliver one potentially helpful initiative: a tripartite future of work forum of Business New Zealand, the Council of Trade Unions and the government. It is organisations like this in Sweden, for example, which helps make it one of the leading countries in terms of a confident workforce eager to upskill itself and embrace change.

Overall, though, the new Government’s first Budget supports conventional approaches to furthering a largely conventional view of the economy. The Government is promising to be radical later with, for example, starting to base from next year its Budget on wider well-being measures rather than narrow ones such as GDP, as described in this Newsroom piece.

“Transformation takes time,” Robertson stressed in his Budget speech in Parliament. “One budget cannot instantly fix nine years of complacency and neglect.”

That’s true. But it ignores a far bigger problem. We, along with the rest of the world, have to understand that only rapid, significant shifts in the way we run our economies, societies and the environment will deliver the progress we desire.

Our last government to think and act so boldly was the Labour government of 1984-90.

Judging by our current Government’s performance to date and its first Budget, it has yet to summon up the courage, creativity and political will to rise to the even bigger challenge of change we face today.

RNZ funding boost in limbo

By Sam Sachdeva

RNZ’s champagne will remain on ice after missing out on additional funding in this year’s Budget, but the Government says it is still committed to boosting the public broadcaster.

During the election campaign, Labour outlined plans to provide $38 million in annual funding for RNZ to develop a multi-platform news and current affairs service, including a free-to-air channel.

Broadcasting Minister Clare Curran, who masterminded the proposal, came under fire for a private meeting with RNZ’s head of news Carol Hirschfeld which she initially claimed was an unofficial catch-up.

Hirschfeld resigned earlier in the year after it was revealed she had misled RNZ bosses about the meeting.

The Government’s 2018 Budget does not include any additional funding for RNZ.

Instead, $15 million of operating funding has set aside for 2018/19 to implement any recommendations from the ministerial advisory group on public media which the Government chooses to accept.

In a media statement announcing the funding, Curran said only that the advisory group “may recommend increased government investment” in RNZ and NZ On Air.

However, she appeared to double down on her original RNZ+ proposal, despite RNZ chief executive Paul Thompson and others within the organisation implying they would rather focus on improving their digital output than the demands of a free-to-air TV channel.

“Over time we want RNZ to have the ability to turn itself into a multi-platform provider dedicated to quality New Zealand programming and journalism,” Curran said.

Finance Minister Grant Robertson said the funding for the advisory group, rather than RNZ, should be seen as an endorsement of the Government’s plans and not a move away from them.

“The $15 million is a first indication I think that we do want to develop a more modern public broadcasting system: the exact amount that we put in will come through in future budgets, but that’s the downpayment on the programme that we’re looking to do.”

Education a Budget winner, but how to find the teachers?

By Shane Cowlishaw

A beleagured education system has been given a Budget boost, but questions remain about who will teach in all the shiny new classrooms.

As expected, education received the bulk of investment alongside health, with the Government spending the past few weeks setting the scene of a ‘rebuild’ budget.

In what could be described as a classic, fiscally-tight first year Budget, there was room to spend more.

Some will be asking why, in a sector that Labour so strongly indicated was in dire straits, more money wasn’t found.

Where the money goes

Both on infrastructure, and more teachers essentially.

Education Minister Chris Hipkins told media last month the problems were far bigger than he imagined and there were at least a couple of hundred million dollars worth of school buildings that were in an “abysmal state”.

In an attempt to address that, $395m in the next three years will be spent on new schools and hundreds of extra classrooms.

Christchurch gets $62m of the package, as part of the school rebuild programme.

With principals scrambling to find enough teachers to cater for expanding rolls, about half of the $649m in operating spending over four years will be spent on 1500 new teachers.

This is $72m more than was allocated by the previous government last year.

Another large chunk, $204m, will go to schools. This is made up of a 1.6 percent cost adjustustment to operational funding (an increase that is lower than many schools were hoping for) and $129m to keep up with growing student numbers.

Early Childhood Education is a big winner, with $590m in new operating funding over four years – double what it was due to get under National.

A real thorny issue still lies in front of the Government, however. Teacher pay.

An extra 1500 teachers to meet a growing population and reduce pressure on existing staff will be welcomed, but were will they come from?

With people leaving the profession in droves, it’s hard to see how a net increase of such size is possible when there are better paying jobs elsewhere.

Both education unions, the PPTA and NZEI, have been salivating on the sidelines since Labour took control of the Beehive and are expecting a serious boost to wages.

They, alongside the Nurses Union, argue salaries do not accurately reflect the workload and it would be impossible to fill labour shortages without making the profession more attractive.

At the launch of its collective bargaining, NZEI president Lynda Stuart announced she would be demanding a 16 percent pay increase over two years for her members. This was estimated to cost the Government an extra $300m a year.

Unsurprisingly, money for pay increases is not laid out for all to see.

It is one that will have to be tackled sooner rather than later though, as Finance Minister Grant Robertson is well aware.

“I’m not the kind of negotiator that’s going to put into the Budget the exact details of what I’m going to put on the table. We have made contingencies,” Robertson said during the Budget lock-up.

Big housing spend falls short of Twyford’s goal

By Thomas Coughlan

Six thousand four hundred state homes will be built over the next four years, equating to 1600 builds a year. Housing Minister Phil Twyford trumpeted the numbers, saying they exceeded the Government’s earlier commitment to build at least 1000 state houses each year.

But the number is lower than Twyford’s hoped-for 2000 homes a year.

The houses will be funded largely through Housing New Zealand borrowing up to $2.9 billion from third parties and investing $900 million from its own operations, as well as an additional $234.4 million in operational funding from Budget 2018.

Twyford said that the register of households waiting for a public house now stood at 7890 plus an additional 1805 waiting for a transfer to a more suitable public house.

The Government also announced a large insulation programme aimed at improving “tens of thousands” of owner-occupier households.

The program will be delivered by grants from the Energy Efficiency and Conservation Authority with $142.5 million in new operating funding allocated over the next four years.

Worker exploitation protection to be boosted

The Labour Inspectorate and Immigration New Zealand will receive a funding boost to assist in the efforts to crack down on worker exploitation.

While in opposition Labour campaigned on a boost to the number of inspectors, pointing at a rapid increase in workers, particularly migrants, forced to work in atrocious conditions.

To help do this, $8.8 million has been put aside for the next four years.

Initially the Labour Inspectorate will use the money to ease an increasing workload and figure out where the additional resources are best used.

This will include a boost to inspector numbers.

Alongside, Immigration Minister Iain Lees-Galloway announced an extra $34m over four years for Immigration NZ to add an extra 29 staff to screen air passengers at the border.

They would be looking for signs of exploitation, from slavery and people trafficking to underpayment of wages.

Dodgy immigration advice is also in the Government’s sights, with $5.6m for the Immigration Advisors Authority to crack down.

Cost pressures facing Immigration NZ have also been addressed, with $21m over four years to help it transition to a new visa operating model.

The boosted funding will be partially recovered from immigration fees and levies.

Big-ticket Defence decisions yet to come despite $400m boost

By Sam Sachdeva

The NZ Defence Force has received a nearly $400 million funding boost, including money to fix rundown buildings – but the Government has held off on committing cash for big-ticket hardware replacements.

With foreign affairs a big winner in this year’s Budget, eyes turned to how much money the NZDF would get as it prepares for an array of significant decisions on upgrading its capabilities.

The last government’s Defence White Paper, released in 2016, outlined plans to spend about $20 billion over 15 years on new aircraft, ships and other assets for a changing strategic environment.

The plans were criticised by Labour while in opposition, and concerns about its predecessor’s plans appear to have flowed through into government.

In March last year, then-Labour leader Andrew Little said the $20b to be spent on the defence upgrade could be better spent on housing and education, while Finance Minister Grant Robertson and Defence Minister Ron Mark have accused National of failing to budget for its promises.

"Stupidly, when we were in opposition we took them at their word. They said this money has been budgeted and this money has been allocated, $20bn out to 2030, and we get into Government – wrong," Mark told RNZ.

As part of its coalition agreement with Labour, New Zealand First secured a commitment to reexamine the defence procurement programme "within the context of the 2016 Defence Capability Plan budget".

However, Robertson’s Budget includes no additional capital funding for the capability components of the White Paper.

Some capital decisions are likely to be made soon after the Budget, with the Government facing a mid-year deadline to make a call on whether to purchase P-8 Poseidon aircraft to replace the existing P-3 Orions.

The Budget does allocate an additional $324m over four years for the NZDF’s operating budget, which it “provides for the operation of the capability requirements” identified in the White Paper.

There is an extra $13.6m set aside over the next four years for similar funding, although it is contingent on Cabinet approving business cases.

NZDF chief Lieutenant General Tim Keating appeared to foreshadow belt-tightening in an internal senior leader message earlier this year, obtained by Newsroom, in which he said the organisation had agreed to reprioritise resources in a number of areas.

“We’ve got to be smart with our resources in order to deliver today and over the next four years. We’ve got to prioritise carefully, and not simply keep taking on more and more.”

The Budget does include a $41.3m increase to capital spending over the next 10 years for the first stage of the Defence Estate Regeneration Programme.

That is some way short of the $1.7b figure in the last government’s Defence Capability Plan to modernise the defence estate by 2030.

The 2016 White Paper noted there was a “risk of rapid deterioration” for the defence estate, made up of about 81,000 hectares and 5000 buildings across nine camps and bases.

The paper said NZDF needed to better manage costs through internal reorganisation and rationalisation of its estate, as well as considering public-private partnerships.

“There will be challenges associated with this work as the estate increasingly comes under pressure from the impacts of urban encroachment, particularly in Auckland.”

That was backed up this week with the news that NZDF is continuing to look at the possibility of moving part of its Devonport naval base.

Waikeria prison on hold but modular units needed

By Shane Cowlishaw

One of the Government’s biggest and most difficult decisions has again been delayed.

The construction of a new mega prison at Waikeria was not confirmed in this year’s Budget.
Instead, an extra $200m will be made available for temporary units to house New Zealand’s skyrocketing prison population.

The “rapid-build modular units” will be stuffed with 600 prisoners and will be built by the end of next year. They are in addition to several other extra units already under construction.

“There has been an enormous growth in our prison population, far beyond what was projected even two or three years ago. The modular units are required right now,” Finance Minister Grant Robertson said.

As the number of people locked up has risen, so has the operating cost, and $316m over four years will be made available to deal with the expenses.

Building the new $1 billion Waikeria prison is something the Government does not want to do and it has been desperately trying to find alternatives.

It is understood that a decision on whether to build it has already been made, but while the funding created in last year’s Budget remains available, its exclusion from this year’s books raises questions about whether it will go ahead.

The current prison on the site is well below standard and in desperate need for an upgrade. At the very least money will be have to spent bringing it up to modern standards.

If the expansion is scrapped, some huge changes to the justice system will have to be made.

Loosening bail and parole rules would make the biggest immediate difference, but is political poison.

More minor initiatives announced in this Budget point to more community based sentences being handed down.

A lack of housing available to recently-released prisoners has been identified as an issue, with $57.6m over four years to provide homes and support services for more than 300 people. This will be delivered through a partnership by Corrections and Housing New Zealand.

Probation and community services get $82.7m, which will be used in part to pay for 270 more probation officers by 2022.

There is also $8.6m to bring the total number of people being electronically monitored to 1000.

Corrections Minister Kelvin Davis said to reach the Government’s goal of reducing the prison population by 30 percent in the next 15 years there needed to be safe and effective alternatives.

“The people who need to be in prison will be in prison. But we will also make sure support is in place to help prevent re-offending, and that offenders who meet the criteria for staying in the community are able to do so safely.”

In the wider justice portfolio money has been provided to meet the extra costs of raising the Youth Court age to 17.

The Ministry of Justice will receive $52m over four years to raise wages and pump into ICT costs, while $88m over four years will be provided to the court system to meet demand for services such as expert reports and lab tests.

Victim Support was a winner with an extra $13.5m over four years and Community Law Centres and the Independent Police Conduct Authority also received funding boosts.

Health: Funding between the lines

By Thomas Coughlan

Budget 2018 unlocks hundreds of millions of extra funding to plug gaps in New Zealand’s creaking health sector, but as Thomas Coughlan reports the long-term outlook isn’t rosy.

The Government has announced $2.2 billion additional spending to DHBs over the next four years. DHBs will also get a big capital injection with $750 million to be spent over the next ten years, and $100 million available as emergency support.

This brings operational DHB funding to $13.2 billion in the 2018/29 year.

“That represents the biggest capital injection in health in at least the last decade,” said Health Minister David Clark.

The capital numbers look big, but considering the Dunedin Hospital rebuild alone is expected to cost $1.4 billion, they’re indicative of a big squeeze going on in the health sector to fund operational spending.

And Dunedin hospital itself is missing, appearing only as part of ‘tagged contingency’ spend for planning and design with funding for the build itself to be allocated in a subsequent Budget.

Treasury’s 2018 Investment Statement estimated that DHBs required $14 billion of spending over the next ten years. The $850 million in additional capital expenditure budgeted here will not be enough to plug the gap.

Health was always going to be a big winner in Budget 2018. Labour had promised $8 billion in new health spending over the next four years and they unveiled $3.8 billion of that spending today. The remaining $4.2 billion will be allocated in following budgets.

Clark took a bullet for the Government in the lead-up to the Budget when he back-pedalled on a promise to universally reducing the cost of visiting a GP by $10 by July 1 this year. He said the proposal would be phased in. Today we learned just how that spend will be ‘phased’.

Cheaper GP visits will initially be targeted to Community Services Card holders, estimated to number 540,000 people. Cardholders will see GP visits become $20 to $30 cheaper.

The Government is also extending eligibility for the Community Services Card to all Housing New Zealand Tenants, people receiving the accommodation supplement or income-related rent subsidy. These two changes will cost $362.7 million over four years.

Free GP visits and prescriptions will be extended to children under the age of 14, an estimated 56,000 young people. This will cost an estimated $22.0 million over four years.

The National Bowel Screening Programme will be expanded to an additional five DHBs from the five where it is currently offered, costing $67.1 million over four years.

Disability Support Services will also receive $210.6 million over four years to cover “population growth, ageing and cost pressures”.

Labour’s two partners have small wins. The Green party has secured $10.5 million over three years for an Integrated Therapies Mental Health Pilot scheme for 18-25 year olds. Modelled on England’s Improving Access to Psychological Therapies it will provide “free counselling” and “evidence-based therapy” for young people.

New Zealand First has managed to secure $1 million to develop a free annual health check for SuperGold card holders.

Midwives protested against low pay outside Parliament two weeks ago. The budget has allocated $112.6 million of spending over the next four years for community support midwives. Clark said that about half of that money has gone to an 8.9 percent increase in fees for 1400 lead maternity carers.

Robertson would not be drawn into what money had been made available for other wage rounds before negotiations concluded. Under “other tagged contingencies”, Robertson has allocated $1.3 billion over the next two years for things like wage rounds, however that money can also be allocated to other funding proposals.

Health is also responsible for $330 million in reallocated spending. The bulk of this will come from Pharmac, which will be responsible for $194 million in savings over the next four years.

This saving will come from the drug purchasing agency taking greater responsibility for purchasing pharmaceuticals for DHBs, which had previously purchased pharmaceuticals themselves. Rolling this spend into Pharmac will allow the organisation to use its enhanced spending power to deliver savings.

This might be optimistic. President Donald Trump has said he plans to take action against bulk-buying agencies like Pharmac who he accuses of ripping off the US pharmaceutical industry. If he is successful, Pharmac's costs might even increase.

"Long overdue" increases for learning support

By Lynn Grieveson

Parents and carers of children with disabilities should find it easier to get educational support for their children following a significant funding boost in the Budget.

The Government has announced what it called "a long overdue boost" for learning support, which will increase in total by more than $272.8 million over four years.

The Ongoing Resource Scheme (ORS), which provides personalised funding for the most disabled students, will receive an extra $133.5 million over five years (starting at $22.3m a year in 2018/19 and rising to just under $44m in 2021/22).

The Government says this will support an extra 1,000 school students from next year.

ORS is a contestable funding scheme, which sees the most disabled students "competing" to prove that their disabilities require ongoing, personalised support. Children with ORS funding have complex learning needs, are often non-verbal and require assistance with toileting and other personal care. Parents and schools have been frustrated at the difficulty of securing funding to support children with challenging needs and severe disabilities in school and to pay for speech therapy, psychologists, occupational therapy and physiotherapy.

More funding for teacher aides

Children who do not quality for ORS funding, including those with behavioural difficulties and learning disabilities such as autism and ADHD, as well as those who are simply struggling with the transition to school, may also find it easier to get support.

Teacher aide funding up - but will it be eaten by pay rises?
Funding for teacher aides is to increase by $59.3m over five years.

Unlike ORS, teacher aide funding is not tied to a specific child, and must be shared around by schools between children who need support. Parents have complained of being pressured to pay for teacher aides themselves and of no aide being provided until their child was failing.

The concern for parents and schools is that much of that funding may end up being eaten by expected increases in teacher aide pay. Pressure for pay rises for traditionally poorly paid (and traditionally largely female) school support staff has been growing since the aged care pay equity agreement reached by the previous government.

The Budget also includes extra funding of $30.2m over five years for sensory schools (for students with visual impairments) and New Zealand sign language.

The Te Kahu Toi intensive wraparound service receives an extra $1.2m a year to support an extra 30 students each year.

All these funding boosts are in addition to the $21.5m funding over five years for early intervention services that was announced before the Budget. This will provide an additional 1,900 preschool children with high needs with support.

Robertson, questioned during the Budget lock-up, conceded that a 1.6 percent increase in the cost adjustments for schools' operational grants was slightly less than recent Budgets (although still up on last year's). But he pointed to the increased funding for special needs as addressing one of the causes of pressures on schools' operational costs, and said he believed schools would be pleased with that approach.

Education Minister Chris Hipkins said learning support funding had been "inadequate for more than a decade". He said the Budget initiatives more than tripled the operational spending and would go a long way toward addressing demand pressures.

But, thanks to high migration, demand pressures have been growing in another area. The Budget also includes $34.5m in funding for support for students with English as a second language. The Government will spend $1.27m on ESOL in 2018/2019 but this will rise to $12.6m in 2021/22.

ProdCom Inquiry on disruptive technology

By BusinessDesk

The Productivity Commission will conduct an investigation into the impacts of technological change and disruption, and the future of work.

The Budget announced the inquiry along with the inquiry into local government funding and financing, which Local Government Minister Nanaia Mahuta announced earlier this week.

Billed as part of the government’s desire to “invest in the productive economy”, the technological disruption inquiry will “address a range of issues to better prepare policymakers and businesses for the potential challenges” that technology may create.

“It will investigate how government policy can best support the adoption of technological change while at the same time ensuring social support and education/skills systems and regulatory settings are able to equitably manage rapid technological change.”

The inquiry will begin in the 2018/19 fiscal year, with its output likely to be used by the newly created tri-partite Future of Work Forum, involving government ministers, peak lobby group Business New Zealand, and the Council of Trade Unions.

NZ capital spend shifted to health, education from transport

By BusinessDesk

Finance Minister Grant Robertson’s $41.8 billion capital spending programme will divert transport funds into health and education – two areas the government has deemed to be woefully underfunded.

Today’s budget affirms the level of capital expenditure over the next four years, trimming $300 million of funding from the New Zealand Transport Agency, while adding another $900 million for district health boards and $300 million for education. NZTA spending is still the biggest at $6.4 billion over the forecast horizon, although the new government’s reticence for building roads has seen it back other modes of transport, while education has $4.3 billion set aside for it.

DHBs have $1.4 billion earmarked for capital spending, compared to just $600 million in the half-year update, which Robertson described as the “biggest capital injection in health in at least the last decade”. That includes $750 million of new capital to deal with the most urgent problems and a $100 million backstop to cover operating deficits.

“Our public services have been underfunded for too long and there has been a failure to appropriately plan for the future. That changes today,” Robertson said in a statement. “The coalition government is rebuilding the critical services Kiwis expect their government to provide – modern hospitals, classrooms kids can learn in, public housing for those for those who need it, efficient transport systems, and safe communities.”

The new spending track has pushed out some investments, with the June 2021 financial year expected to see the most activity, a year later than the previous forecast. The government’s flagship KiwBuild programme will also see spending delayed, with $1 billion of the $1.9 billion forecast expected to fall in 2021, reflecting construction sector constraints.

Robertson said capital spending can be lumpy, and there “maybe further rephrasing of these allowances”.

The capital spending programme doubles advances to Crown Infrastructure Partners to $1.2 billion, and Robertson said the government will use the balance sheets of entities such as CIP to help fund the KiwiBuild programme. Housing New Zealand will be able to borrow up to $2.9 billion from third parties and invest $900 million from its own operations to increase public housing by 6,400 houses over the next four years.

Other beneficiaries of the planned capital spend include the prison system, with $198.4 million set aside to accommodate an extra 600 prisoners in rapid-build modular units by the end of next year. Decisions on a $1 billion rebuilding of the outdated Waikeria prison have yet to be made.

Defence has $3 billion earmarked for capital spending over the next four years, including an extra $42.3 million in today’s budget under the Defence Estate Regeneration Programme. Replacement of its P3-Orion fleet of surveillance aircraft is flagged as a new fiscal risk.

Another $298.5 million has been set aside for the Canterbury rebuild, which will help fund the completion of the city’s Metro Sports Facility and financing new uses of the residential ‘red zone’. Christchurch City Council will be able to apply for capital from that fund to complete projects beyond existing arrangements with the Crown.

The budget also includes $100 million for the government’s supply partner, the Green Party, to set up a Green Investment Fund to encourage private sector investment in low-carbon industries. Detailed policy work on the fund has only just begun.

The Provincial Growth Fund has $316 million allocated to capital spending of its annual $1 billion available total funds.

Capital allowances are expected to add another $6 billion of spending through the forecast period and another $6 billion beyond.

Construction bottleneck threatens KiwiBuild outlook

By BusinessDesk

Bottlenecks in the booming construction industry see weak growth in residential house-building over the next 12 months and have forced the Treasury to halve its forecast rate of progress on the government’s KiwiBuild affordable housing policy.

Where forecasts before Christmas assumed around $5 billion of KiwiBuild-induced “additional nominal residential investment” over the next five years, the forecast is now for just $2.5 billion over that period.

“A greater proportion is assumed to occur outside the forecast period," says commentary from the Treasury in its Budget Fiscal and Economic Update (BEFU), which is published with the Budget.

Finance Minister Grant Robertson told journalists there was no change to the government’s plan to build 100,000 affordable homes within a 10 year period.

The new forecast makes assumptions about how much extra activity the KiwiBuild scheme will induce and about the impact of government policies intended to alleviate construction sector constraints, including migrant construction workers coming to New Zealand under a special KiwiBuild visa.

“There remains a high degree of uncertainty about the impact that these policies may have,” Treasury said. “Growth in real residential investment may be weaker than forecast if capacity constraints are more binding than assumed.”

That could also lead to KiwiBuild substituting for “other developments that would otherwise have taken place”.

However, the Budget economic forecasts are bullish about the economic outlook over the next five years, driven by an expectation that immigration will fall by less than previously assumed, prices for New Zealand’s exports will remain strong, and the global economy will continue to grow at a robust rate.

On top of that, the surge in government spending caused by the previously announced July 1 Families Package and other initiatives announced in the Budget are expected to underpin average annual growth of 2.9 percent over the next five years.

The forecasts expect real (inflation-adjusted) growth in gross domestic product in the year to June 2019 of 3.3 percent, followed by 3.4 percent in the year to June 2020, and then falling to 2.4 percent and 2.5 percent in the two following years.

These increases are one of the reasons for higher tax revenue forecasts over the next five years, which underpin a larger government spending programme while allowing it to declare Budget surpluses and meet its debt targets.

Inflation stays at or below 2 percent a year throughout the five-year forecast, lower than forecast average wage increases. Compared to the 1.6 percent wage rise in the year to June last year, the June 2018 annual increase in wages is forecast at 3.2 percent and averages 3.1 percent over the next five years.

The current account deficit remains stable at around 3 percent of GDP, unemployment drifts down close to 4 percent by 2020 and stays there, while participation rates in the workforce remain high by world standards at close to 71 percent over the whole five years.

While business investment takes a hit in the year ahead, with a forecast increase of just 1.4 percent, it recovers to a 5 percent increase in 2020, reflecting the Treasury’s judgement that the current slump in business confidence will be short-lived.

However, it notes that “it is possible that uncertainty around any other reforms and their combined impact leads to more cautious behaviour” by investors.

However, much rests on the assumption that very current high levels of net immigration – 68,000 in the year to March – will fall to 25,000 by 2022. That is 10,000 higher than previous Treasury estimates, reflecting the agency’s decision to reset its migration forecasting to mirror the reality of recent history.

However, it also publishes forecasts from an external agency, Sense Partners, whose forecast suggests net immigration could settle around 40,000 a year, based on combining five different forecasting models.

That would raise economic growth rates, increase employment, worsen housing shortages, probably spark higher house price inflation and is assumed to lead to higher interest rates.

A high-immigration scenario published in the BEFU raises the average growth rate over the next five years to 3.1 percent, produces a larger budget surplus than is officially forecast in the Budget, and would get the government to its Crown debt reduction target a year early.

Also published is a scenario in which global trade protectionism increases beyond levels already accounted for, knocking the growth rate over the next five years down to 2.7 percent a year, producing lower surpluses and causing the government to miss its 2022 target to reduce net Crown debt to 20 percent of GDP by 1.4 percentage points.

New watchdogs for fiscal, RMA, and EQC disputes

By BusinessDesk

The Budget creates three new government quangos to run the rule over political parties’ spending promises, keep tabs on local governments’ administration of the Resource Management Act, and a special tribunal to sort out Canterbury earthquake insurance disputes.

Dubbed the “independent fiscal institution”, the new body to provide all political parties with non-partisan advice on costing their policies is a Green Party policy that was included as part of its confidence and supply agreement, allowing the Labour Party to form a government last October.

The IFI would provide the public with an assessment of government forecasts and cost political parties’ policies, said Finance Minister Grant Robertson.

Greens co-leader James Shaw said that 25 of the 36 member countries of OECD have such bodies and that they can “crunch political parties’ election promises in a credible way”.

The quality of election policy costings by the government’s coalition partner, New Zealand First, was heavily criticised before the 2017 election, while the then National Party Finance Minister, Steven Joyce, made political capital by suggesting Labour faced an $11.7 billion ‘fiscal hole’ in its plans.

Separately, Environment Minister David Parker announced the creation of a new unit “to oversee compliance with the Resource Management Act.

“At present, compliance, monitoring and enforcement actions are somewhat variable across councils,” said Parker.

The oversight unit, costing $3.1 million over the next four years, would “complement guidelines developed by councils to meet their responsibilities”.

Earthquake Commission Minister Megan Woods and Courts Minister Andrew Little also announced the creation of a special insurance tribunal to resolve outstanding EQC and insurance claims relating to the Canterbury and other earthquakes.

Govt sets aside $1 bln for R&D tax credit

By BusinessDesk

The government has set aside about $1 billion over the next four years for tax rebates from the research and development tax credit, which Innovation Minister Megan Woods hopes will spur on the level private sector R&D investment.

The pre-announced tax credit lets businesses claim 12.5 cents in the dollar back for every dollar they spend on R&D, provided that bill is more than $100,000 a year. Woods announced the tax credit, which the Labour-led government prefers over the Callaghan Innovation grant scheme of picking winners. Callaghan's Growth Grants scheme will be phased down as the tax credit comes in, from next April.

The budget gave the expected scope of the R&D credit, with the Crown putting aside $1 billion over the forecast horizon Some $71.2 millionis earmarked for the current year, rising to $350 million by 2022. That figure will also cover the cost of implementing the programme.

“This system will help us transition away from the current growth grants model, which is available to a narrower range of firms,” Woods said in a statement. “This represents a significant increase in the amount available to help smart Kiwi businesses to innovate.”

The budget documents identified the tax credit as a fiscal risk, given the lack of data available for forecasting, and international experience showing the “costs of R&D tax credits can be significantly higher than expected”.

The budget also cuts $2.4 million from the June 2019 year from the accelerator innovation fund, which was delivered through Callaghan, and is currently under review.

M. Bovis to need ‘significant’ spend, Robertson says

By BusinessDesk

The government has allocated $85 million of operating funding in the current year to deal with the Mycoplasma bovis outbreak, but a looming report will likely spell out a “significant” bill, Finance Minister Grant Robertson says.

Today’s budget added another $9.3 million of operating funding to improve overseas biosecurity systems, and Robertson told media in Wellington the Crown needs to “look at different ways of dealing with biosecurity incursions” which have been on the rise in recent years. Among those is the cattle disease Mycoplasma bovis, which has spread across the country and seen 300 farms under surveillance or lockdown. The Crown is still deciding on whether it can eradicate the disease or should just manage it.

Robertson said Cabinet will receive a report back on the extent of costs, which will show up in the half-year update.

“I have no doubt we will need to spend significant amounts of money to respond to Mycoplasma bovis,” he said.

The Treasury noted the biosecurity response to the cattle disease as a policy risk in the budget documents, saying the cost will depend on what response the Ministry for Primary Industries pursues.

“Any approach is likely to be a large-scale response, and the ministry is unlikely to meet operational and biosecurity costs within its baseline,” the document said.

That response has been bolstered by an $11.2 million contribution from the local cattle industry.

The primary sector also got a $15 million boost to the Sustainable Farming Fund and a $5 million increase for the Overseer farm management tool, both of which aim to lift environmental practices on farms.

The new policy direction also stripped out and reprioritised $163 million over the four-year period, cancelling subsidies for irrigation and the primary growth partnership and dropping the food export value and trusted trader programmes.

The forecasts project operating spending on primary services of $851 million in the year ending June 30, 2018, amounting to 1 percent of core Crown expenses, falling to $620 million by the 2020 year, or 0.6 percent of total spending.

Robertson finds $24B extra as economy lifts tax take

By Business Desk

Finance Minister Grant Robertson has found an extra $24 billion to spend over the next four years by taking in more tax, reprioritising existing expenses, and thanks to delaying the previous government's debt reduction target by two years.

The biggest share of the forecast increase in operating and capital spending over the next four years – 38 percent – comes from what Robertson calls “a responsible debt reduction track” announced as part of the government's election policy platform last year.

By adding two years to the time it will take to shrink core Crown debt to 20 percent of gross domestic product, he finds $9 billion that the previous government didn’t have. A further 33 percent of the new spending, or $7.9 billion, comes from the already announced reversal of National’s tax cuts.

He found another $1.5 billion from a combination of tax tweaks - a crackdown on tax dodgers, new property taxes, GST on low value imported goods - and from reprioritisation – some $700 million of savings from existing departmental budgets.

The strength of the New Zealand economy does the rest. While the Treasury has lowered its forecasts for GDP growth in the 2018 and 2019 June years, compared to the Half Year Economic and Fiscal Update (Hyefu) in December, growth comes bouncing back from 2020 through 2022.

The result is $5.3 billion more in tax revenue than was projected under National in last year’s Pre-Election and Fiscal Update. All up, Robertson has found $18 billion in extra operating spending and $6 billion in capital spending than National was projecting.

“Responsible management of the government finances and a strong economy have given us room to increase the operating and capital allowances at Budget 2018 and continue to meet the Budget responsibility rules,” Robertson said.

Over the next five years, the government expects to lift core Crown tax revenue by $23.4 billion, with the biggest increases coming from source deductions and GST. The Treasury says economic growth will be driven by “a solid international outlook, high terms of trade, increased government spending, and growth in domestic economic activity.”

Compared with the Hyefu in December, the Treasury now projects $46 billion more in nominal GDP, although all but $6 billion of that reflects technical revisions to the GDP starting point, reducing the actual gain to $6 billion.

Net core Crown debt remains little changed over the next four years before reducing to 19.1 percent of GDP in 2022.

Core Crown expenses are $6.1 billion higher over the next five years than was projected in the Hyefu but taken alongside the improved track for revenue, the net increase in the operating budget before gains and losses (obegal) is just $400 million compared to the forecast in December.

Despite the reliance on increased revenue, Budget 2018 had little in the way of new tax initiatives.

That’s because tax reform is on its own track. The Tax Working Group, with a mandate to look at the structure, fairness and balance of the tax system, expects to produce draft recommendations toward the end of the year with any major new policy to be taken to the electorate at the general election scheduled for 2020. There are currently papers out for submissions on R&D tax credits, GST on imported goods and loss ring-fencing for rental properties, as well as work to update the Tax Administration Act.

NZ debt profile tilted long term

By Business Desk

The New Zealand Debt Management Office will increase its sale of government bonds over the next four years, while trimming short-term Treasury bills, lifting the borrowing programme by about $1 billion.

The government’s borrowing programme will issue more bonds in the 2019 through 2021 years, taking gross issuance to $38 billion over the coming four years, up from $35 billion expected in the half-year update, while trimming $2 billion from the T-bill programme in the current year and smoothing other short-term issues in later years.

“This reflects the more flexible approach to T-bill issuance that will be implemented by the NZDMO from 1 July 2018,” the agency said in a statement.

The Labour-led government has adopted a slower debt repayment track than its predecessor, with net debt falling to 19.1 percent of gross domestic product by 2022 from 20.8 percent in the current year.

Today’s document reaffirmed the government’s intention to keep levels of NZ government bonds on issue “at not less than 20 percent of GDP over time”, saying the programme is needed to ensure ongoing access to funding and supporting the books in the event of a future shock, reducing volatility of borrowing through economic cycles and bolstering the wider capital market.

While New Zealand’s interest rates are anchored by flat inflation expectations, global rates have been rising with the yield on US 10-year Treasuries at a seven-year high of 3.1 percent.

Have a great day,

cheers,

Bernard

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