Week in Review
Robertson reveals $12b infrastructure boost
Finance Minister Grant Robertson has announced a $12 billion capital spend, including $6.8 billion for transport projects - but we'll have to wait until next year for more details.
Capital investment will rise to the highest level in more than two decades after Finance Minister Grant Robertson announced another $12 billion of new investment on Wednesday.
The announcement accompanied Treasury’s Half Year Economic and Fiscal Update (HYEFU) and will still keep government debt well within its revised budget responsibility rules, between 15 to 25 percent of GDP.
According to the Treasury, the new spending will drive net core Crown debt as a percentage of GDP up from 19 percent in 2019 to a peak of 21.5 percent in the 2022 fiscal year – below both the Government’s own 25 percent threshold and the 22.9 percent debt it inherited in 2017. At that point, the figure will tumble to 19.6 percent by mid-2024.
The spend includes $8 billion earmarked for specific projects and another $4 billion for the multi-year capital allowance, which will nearly double to $8.4 billion.
Robertson said now was the right time to boost government investment in infrastructure, providing an additional boost for the economy in the face of slower growth and economic headwinds.
“The cost of borrowing is low, the projects are there to be done, the books are in good shape, and the economy can do with it.”
Robertson defended the lack of detail regarding specific projects and timings, confirming the Government had already decided on the capital projects it would fund but needed to “dot the Is and cross the Ts” before it could confirm its plans in early 2020.
While many of the projects were already consented and shovel-ready, in other areas there would be more work needed before initiatives could begin.
“If you look particularly at the projects that are in the areas outside of transport...most of them could be pushed go on right away today. Some of the transport projects will require more work on consenting, some are ready to go.”
A 'balanced' approach to transport
Robertson would not reveal whether any of the last government’s Roads of National Significance projects would be funded, but said the Government would take a “balanced” approach to different modes of transport.
The minister took a dig at National's roading plans, describing them as a "wishlist" that had not been funded, and in some cases not even consented.
The transport investment would be separate to the National Land Transport Fund, but would still require sound cost-benefit analyses to proceed.
Another $300 million will go to regional investment opportunities, $300 million to district health boards and $200 million for “public estate decarbonisation”. The final component of the spend, $400 million for school infrastructure, was announced two weeks ago.
Robertson defended the lack of investments in housing and water infrastructure. In the case of the former, he said the Government had also made significant investments in public housing and KiwiBuild and was still in talks with the new housing agency Kainga Ora about further projects.
Most water infrastructure was not owned by the Crown but by local councils, and the Government needed to consider how it could best provide support in that area, he said.
Pressed on whether the Government could have pushed towards the higher end of its debt target and provided more operational investments, such as in welfare increases or other financial transfers, Robertson said there was still time in the current Budget cycle for further investments to be announced ahead of the 2020 election.
In the face of a slowing economy, Treasury revised its GDP growth forecast down to 2.2 percent for the 2020 financial year. That figure would then rise to 2.8 percent in 2021 and then fall steadily through mid-2024, the end of the forecast period.
In the May fiscal and economic update that accompanied Budget 2019, Treasury had forecast 3 percent GDP growth for 2020 and then a steady decline to 2.4 percent through mid-2023.
The unemployment rate predictions have also been altered. Treasury in May had anticipated unemployment rising about 0.1 percent each year, from a low of 4.0 percent in 2020.
While the Government brought unemployment to a ten-year low of 3.9 percent in 2019, beating May forecasts, the rate is now expected to fluctuate between 4.2 and 4.3 percent for the remainder of the forecast period.
Wage growth for 2020 has been revised down slightly, from 3.2 percent to 3 percent, but the pattern of steadily increasing growth to around 3.6 percent by the end of the forecast period remains unchanged.
Nominal GDP will increase over the year ahead as projected but growth will still fall short of May’s expectations. “Nominal GDP is lower in each forecast year and, in total, is $5.1 billion lower than in the Budget Update,” the HYEFU states.
The Government’s new capital spend is expected to “increase the size of the economy by a further $10 billion over the next five years,” Robertson said.
Major changes to fiscal outlook
Core Crown tax revenue projections have been shifted downwards by around $1 billion per year over the forecast period. By 2024, the Government will be bringing in $110.5 billion, the Treasury says, a $24 billion increase on 2019’s haul.
Treasury says capital expenditure will continue to rise alongside tax revenue to $109.2 billion by 2024. The Government will spend $5 billion more than it brings in for the 2020 fiscal year and $4.5 billion more than its tax revenue in 2021.
In May, Treasury forecast an operating balance before gains and losses (OBEGAL) surplus of $3.5 billion for 2019. The Government more than doubled that figure, largely due to temporary, one-off factors. It now predicts an OBEGAL deficit of $900 million for 2020 before breaking even the next year and rising to a $5.9 billion surplus by 2024.
This is still a significant decrease in the forecast OBEGAL for the period by at least $2 billion per year. The downward OBEGAL revision for 2020 is due, Treasury says, to ACC forecast losses of $700 million due to lower interest rates. Over the subsequent period, expected DHB costs are driving the decline.
“Crown entity forecasts have been revised with DHBs and ACC forecasts weakening,” the HYEFU states. “The DHBs’ financial performance continues to deteriorate. At the same time, ACC is expecting higher insurance claims costs than previous forecast.”
Treasury estimates the Government will face a total cash shortfall of $20 billion over the forecast period, to be paid for by more borrowing. This will drive net core Crown debt from 19 percent of GDP in 2019 to a peak of 21.5 percent of GDP in 2022. That figure will then drop to 20.9 percent in 2023 and 19.6 percent in 2024, the Treasury says.
Total borrowings will reach $145.3 billion by the end of the forecast period, or 37.3 percent of GDP. “This increase is a result of issuing additional government bonds to help fund the cash shortfall, an increase in Kiwibank borrowings (eg, deposits held) and an increase in Crown entity borrowings,” the HYEFU states.
Finally, Robertson may be glad to see that Treasury has revised its fiscal impulse predictions up to 0.9 percent and 0.3 percent for 2020 and 2021 from 0 percent and -0.2 percent, respectively. This figure approximates the impact of fiscal stimulus on the economy but doesn’t take into account second round effects.
Robertson said that the capital spend announced on Wednesday would have significant second round effects and would be a greater boost to the economy than the fiscal impulse figure indicates.
Migration a major factor
Treasury admitted in its HYEFU that “the global outlook and net immigration remain key sources of uncertainty. Global risks remain tilted towards slower growth and weaker demand for New Zealand’s exports. In contrast, the tight labour market suggests net immigration could be stronger than assumed.”
In its 2018 HYEFU, the Treasury estimated that permanent and long-term immigration would decline to 25,000 by 2022 and remain stable thereafter. Now, it has revised its forecast, acknowledging that the high migration figures seen in recent years likely signal a new, higher normal. The Treasury’s 2019 prediction has net migration dropping to 35,000 by 2024.
In order to grapple with the uncertainty that migration provides, Treasury ran the numbers on an alternative scenario under which net migration remains at 50,000 or even increases. Such an outcome would, Treasury says, bump up GDP growth, buoy OBEGAL and keep net core Crown debt to 20.7 percent of GDP. Debt would reach just 17.7 percent of GDP by 2024 under this model.
A second alternative scenario Treasury considered was “increased trade disruptions”. This would have an adverse impact on the economy, driving down GDP growth and pushing net core Crown debt to a peak of 22.3 percent of GDP.
In Wellington and Auckland, the responses to the Government’s announcement were varied. National’s finance spokesperson Paul Goldsmith joined Simon Bridges in attacking the prospect of a 2020 deficit as “incompetence”.
“It’s an astonishing turnaround in two years. To inherit a fast-growing economy and big surpluses as far as the eye can see and turn that into a slow-growing economy and deficits in two years is astonishing,” he said.
“Labour’s screwing up the economy in two short years. They have gone from surpluses as far as the eye can see to into the red. It’s unbelievable,” Bridges added.
Goldsmith said he didn’t think the Government would return a surplus in 2021 as Treasury forecasts.
“I don’t believe for a moment that we’ll see those surpluses. They promised surpluses this year and we’re going to be going into deficit and you can rest assured that once they get a taste for deficits, they’ll keep them going year after year,” he said.
The Taxpayers’ Union also criticised the Government’s spending. “At a time of high commodity prices and a record-high tax take, there is no excuse for the Government to run up a deficit, even a temporary one,” spokesperson Louis Houlbrooke said.
On the other hand, industry and labour alike welcomed the prospect of infrastructure investment. The Employers and Manufacturers Association said transport spending in particular was “welcome news”.
“While details about which projects will receive the new funding are being held back - they are likely to be announced in the New Year - there are a number of public transport, rail and road projects across the upper North Island that are virtually ready to go and if brought forward will bring considerable benefits to businesses in the region,” the EMA’s head of advocacy and strategy Alan McDonald said.
BusinessNZ chief executive Kirk Hope said the Government needs “to make sure the projects can be executed, and that decisions are worked through Infrastructure Commission to ensure investments are strategic and contribute to New Zealand’s growth in productivity. It will be important that capacity constraints don’t restrict execution of essential short- and medium-term projects, and that the projects are strongly aligned with immigration and training policies.”
The Council of Trade Unions praised the infrastructure investment as “greatly needed”.
“After a long period of neglect we have fallen well behind and this investment is significant. It makes sense given government debt levels are low and its borrowing is currently very cheap,” CTU economist and policy director Bill Rosenberg said.
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