New Zealand 2016 Budget likely to focus on debt reduction

The New Zealand 2016 Budget to be released on May 26, Thursday is expected to remain on a low-key note, concentrating its focus on debt reduction with no real pressure for a change of course in either direction. Unlike in many rich countries, the operating balance has been brought back into, but projected to increase over time, Westpac reported.

The NZ economy is continuing to grow at a modest pace. However, Finance Minister, Bill English has announced an aim to bring the net debt-to-GDP ratio down faster and to that effect, has signaled some cutbacks to the new spending allowances. This would require strong economic growth amid rising surpluses to substantiate the upcoming change in the budget. Meanwhile, the budget is expected to incorporate policy to support the ailing housing market and raise the supply of houses.

In his pre-Budget speech, English had said that he is aiming to bring net Crown debt down to 20 pct of GDP by 2020, from around 26 pct currently. Given that last December’s Half-Year Fiscal Update projected a net debt ratio of 24 pct by that date, this would require a $12bn reduction in the net debt projections – a fairly demanding task, reports confirmed.

The Fin Min has signaled some changes to the spending plans for the next few Budgets. While some spending will be brought forward into the coming year to meet the needs of a rapidly growing population, the government is planning to reduce the combined operational and capital spending allowances by around $1.2bn over the next five years.

"We have a less positive view on economic growth over the full five-year forecast period," Westpac said in research note.

It should also be noted that the Government is no longer allowing for future tax cuts in its spending allowances. However, the Prime Minister has expressed a desire to include tax cuts in future budgets. The Government has become increasingly vocal about the need for the Auckland Council to free up more land for new building. But it seems difficult on this front prior to the deadline for the Auckland Unitary plan being approved in August.