Economists say this week's Budget is going to make 'good reading' when compared with the gloomy updates over the past year

The Budget to be unveiled by Finance Minster Grant Robertson on Thursday (May 20) is going to make "good reading" when compared with the gloomy economic updates over the past Covid-affected year, according to Westpac economists.

In their Weekly Commentary, the economists say the Budget will show a "relatively rosy" picture of the economy and the Government’s accounts.

"Indeed, so soon after the pandemic, the kinds of numbers presented will be the envy of many a nation," they say.

"...We expect this year’s operating balance to end up around $8 billion higher than the Treasury forecast back in December. And from that point, we anticipate that the deficit will progressively narrow so that the operating balance approaches zero by 2025."

They say some of the improvement in the Crown accounts will reflect that the Treasury’s economic forecasts "were the most pessimistic of the lot".

"For example, we expect 4.7% growth in the June 2021 year, whereas back at the end of last year the Treasury had projected just 1.5%. With that in mind, Treasury’s large upward revisions will also ultimately flow through to a significantly smaller Government bond issuance programme."

'Having its cake and eating it'

Budget 2021 is likely to be a case of the Government having its cake and eating it too, the Westpac economists say.

"Such has been the magnitude of the positive surprise, the Finance Minister will be able to present massively improved fiscal accounts on Thursday and at the same time announce an increase in spending and investment plans."

Kiwibank economists see the Budget as being a balancing act between the ongoing Covid recovery, "and a premature desire to reduce a pile of debt that is by all accounts modest by international standards".

"The Government's books start from a much stronger position. The latest accounts revealed a $4 billion upside surprise in tax revenue leading to a $5 billion smaller deficit in the nine months to March 2021 than forecast at the half-year update back in December," they say.

"We know that the Government has signalled increases in both operating and capital allowances from those previously pencilled in. But despite upward tweaks to spending, a larger nominal GDP track is likely to see the Treasury project smaller operating deficits over the forecast period. An operating surplus by the end of the forecast period is also in the realm of possibility."

However, the Kiwibank economists say they feel that "a rush to fiscal surpluses" is the wrong step.

'Someone' surplus is another's deficit'

"After all, someone's surplus is another's deficit. NZ also continues to face both massive housing and infrastructure deficits. And there's the ever-present need for action on climate change. Bold investment in NZ's infrastructure and public housing stock will underpin future growth and help speed-up inevitable debt reduction ahead."

ASB senior economist Jane Turner says the NZ economy is "still in a fragile place" and the Government needs to avoid weaning off fiscal support too soon. 

"To be working in harmony with monetary policy settings, fiscal settings also need to be stimulating the economy over 2021, rather than restraining it.  Finally, infrastructure is creaking at the seams as the population growth of recent years has placed pressure on everything including health, education and transport," she says

ASB economists forecast that net core Crown debt will peak under 50% of GDP by 2023/23 and then drop back to 41% by 2025. 

'A relatively strong position'

"The Australians have a similar target in last week’s Budget, with Australian net debt forecast to peak at 40.9% in 2024. This places NZ and Australia in a relatively strong position compared to some of our international counter parts who have been hit harder by COVID-19, such as the UK and the US which are both forecast to see net debt rising to over 100% of GDP by 2025 (according to the IMF’s April World Economic Forecasts)."

BNZ head of research Stephen Toplis says the Minister of Finance is adamant he wants to maintain a modicum of austerity that should result in reductions to both the deficit and debt projections over time.

"Indeed, it is conceivable Treasury will forecast a return to fiscal surplus before the end of the forecast horizon. That said, the Minister of Finance has made it clear that he is not a strong supporter of maintaining the government’s long term debt target of 20% of GDP. At some stage, and it may be this Budget, expect that target to be raised."

ANZ economists say it looks like the Budget will aim to carefully balance the need to rebuild fiscal buffers with addressing some of NZ’s biggest issues (such as housing affordability and child poverty).

'Big inroads can be made'

"In our view, big inroads can be made on the social side of the ledger by going hard to address the housing crisis, but we’re sceptical that throwing money at the problem will have much impact. Construction is already running at capacity, so the Government’s focus really needs to be on addressing supply-side constraints, " they say.

"There’s no quick fix to the lack of building supplies, but freeing up a lot of land for development and cutting red tape are probably the most powerful tools in the Government’s arsenal.

"Going hard in this space can be challenging from a political perspective when many voters’ retirement plans include a capital gain on their house(s).

"But it’s also likely that unless change is radical and house prices actually fall relative to incomes, the nasty social outcomes accompanying the housing crisis will never fully abate."