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Budget 2017 Executive Summary

Budget 2017 Executive Summary

Budget 2017 Executive Summary – Putting it all on the line

Adrian Wimmers - KPMG NZ - Partner

Partner - Deal Advisory, Head of Infrastructure

KPMG in New Zealand


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Budget 2017 Executive Summary

We predicted that the Budget would try to scratch a lot of itches. It would have a strong focus on middle income earners, infrastructure and social investment.

By and large, this is exactly what Hon Steven Joyce has served up in his first Budget.

The centerpiece is a carefully targeted tax and family package worth around $2b per annum once fully implemented. This will lift the two lower tax brackets, increase the Accommodation Supplement for the first time in 12 years, remove the Independent Earner Tax Credit and lift the Family Tax Credit within Working for Families. The Government expects the package as a whole to benefit around 1.3m families by an average of $26 per week from 1 April 2018.  The weekly gain varies depending on family income.

Infrastructure spending is the next big focus area, with $4bn of new capital expenditure allocated across the four years of the Budget forecast. The list includes new schools and classrooms, health sector projects, defence equipment and estate upgrades, roads, the CRL project, new prison capacity, water storage and to free up Crown land for more housing development. The Government is also committing to a further $7b in new capital spend over the next three budgets.  The Minister of Finance was keen to note this soaks up the entire cash surplus generated over the forecast period.

Spending on public services, including the increasingly high profile Social Investment approach is the next focus area. In total, around $7b over four years has been allocated to public services. Any which way you cut it this is a large package of spending. The Health sector gets the lion’s share at $3.9b, which includes the previously announced care worker wage settlement of $1.5b. Other priorities include Oranga Tamariki, social housing, education, a 10% increase in police staff, the justice system, and social development. Social Investment is cemented as the innovation engine of public service spending, with $321m allocated to cross-agency initiatives, the largest of which relates to mental health.

The main area we undercooked in our forecast was a package of initiatives under the Business Growth Agenda. In addition to R&D and skills spending increases, the package includes $93m in new Māori Development initiatives. Previously announced screen sector and tourist infrastructure funds, as well as investment in New Zealand’s trade presence are also on the list. A small unpredicted but necessary sting in the tail is an increase in the EQC levy paid by house owners of up to $69 per annum. This is to replenish the National Disaster Fund emptied by the Christchurch and Kaikōura earthquakes.

The spending is underpinned by a forecast series of increasing surpluses and robust economic growth, averaging around 3% Real GDP growth per annum over coming years. CPI is predicted to stay in the 1 to 3% target band and unemployment expected to drop, although migration is expected to rise further before it abates. The Debt to GDP ratio continues to decline, albeit driven by GDP growth rather than net debt reduction.

This is a Budget in which the Government is looking to share the benefits of the prolonged period of restraint since the Global Financial Crisis. In reality, it is projecting to spend all it can without increasing net debt. It will not be an easy Budget to out-spend while remaining fiscally prudent. We expect the main debate to be about where the money should be spent, rather than how much money is spent.

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