Forecast fiscal contraction in 2014/15 reverses into slight stimulus as Government announces bigger new spending allowances ahead of election

By Bernard Hickey

The Government has relaxed fiscal policy by 0.8% of GDP this year and increased its discretionary spending allowance by NZ$500 million a year to NZ$1.5 billion for the next three years, giving it enough room for tax cuts after the election.

However, Finance Minister Bill English said he did not think it would put too much pressure on interest rates.

"Advice from the Treasury is that lifting Budget spending allowances to around NZ$1.5 billion a year is about the upper limit for increased spending, or revenue initiatives, before they begin to materially affect interest rates," English said in his speech to Parliament.

"The Government is therefore lifting the operating allowance for Budget 2015 from NZ$1 billion to NZ$1.5 billion, growing after that at 2% each Budget," he said.

Treasury papers showed the fiscal impulse or stimulus to the economy in the year to June 30, 2015 would be 0.1% of GDP, which compares with a contraction of 0.7% of GDP forecast in the December half year update.  The fiscal impulse is the Treasury's measure of how much the Government is stimulating or contracting the economy and therefore putting upward or downward pressure on interest rates.

It said that the Government's new policy stance was expected to withdraw 0.6% from aggregate demand on average each year over the latter part of the 2014-18 forecast period. This was down from an average 0.7% forecast in December.

Another measure of fiscal tightness or looseness is the Cyclically Adjusted Balance (CAB), which the Treasury forecast would not enter a surplus until 2015/16 – a year after the official OBEGAL surplus is reached.

"By the end of the forecast period in 2018, the cyclically adjusted balance reaches a surplus of 1.3% of GDP. This is 0.8% lower than previously forecast, largely as a result of higher forecast operating allowances from Budget 2015 onwards," Treasury said.