We wrap-up some of the business reaction to Budget 2014

Reaction to the Budget has been coming thick and fast from the business community.

We are here reproducing some of this in full.

So far the Budget appears to have earned a tick from the credit rating agencies.

Also included here is the comprehensive response from financial advisory firms, from the body representing the banking industry and from farmers.

Here is the reaction from Standard & Poor's:

Bulletin: Ratings On New Zealand Unaffected By Government's 2015 Budget

MELBOURNE (Standard & Poor's) May 15, 2014--Standard & Poor's Ratings Services said today that the New Zealand government's proposed budget for the fiscal year ending June 30, 2015, will have no immediate effect on the ratings and outlook on New Zealand (Crown; foreign currency rating AA/Stable/A-1+; local currency rating AA+/Stable/A-1+). 

The Crown's latest budget projections are in line with our expectations. The government remains on track to meeting its target of an operating surplus in fiscal 2015. This should further improve the government's fiscal balance, which we expect to be in a broadly balanced position by fiscal 2017, from a moderate deficit of close to 2% of GDP in fiscal 2015. As a result, we expect general government net debt to peak at less than 30% of GDP.

Moreover, we expect the government to remain committed to its fiscal strategy of targeting near-term operating surpluses and, in the medium term, reducing net debt as a share of GDP. Although a general election is due in September 2014, we believe the current fiscal strategy would be broadly unaffected by any change in government, due to New Zealand's strong political and community consensus for prudent fiscal management.

Overall, New Zealand's credit metrics remain consistent with the 'AA' foreign currency rating. The government is consolidating its fiscal position, partly reflecting its ongoing efforts to reduce its cost base while maintaining public services. It also reflects a favourable economic backdrop, with economic growth robust and the terms of trade very high (notwithstanding recent falls in global dairy prices). 

Under Standard & Poor’s policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.

Here is the EY analysis of Budget 2014:

A pop song Budget for a rock star economy?

Budget 2014 is first and foremost a conservative budget.  You could only be disappointed if you went into it expecting something spectacular.  This budget didn’t disappoint because we got exactly what we expected: more of the same.  This is not a budget that will change anyone’s opinion of the Government, be they friend or foe.  But it does allow the Government to keep its powder dry in the run up to the election.

The much promised return to surplus, a key plank of the Government’s strategy over the last few years, has been delivered on.  The surplus is forecast at $372 million for 2014/15, consistent with the expectations that it would be “wafer thin”, and expected to grow to $3.5 billion in 2017/18. Even this is a modest surplus compared to the large surpluses the Labour government ran from 2004 to 2008. But a budget surplus is not a goal in its own right; it is a tool to achieve the Government’s key long term goal of getting net Crown debt back down to under 20% of GDP.  At the start of the GFC, New Zealand’s net Crown debt was an enviable 5.5% of GDP.  This low net debt, and the headroom it gave the government to run deficits and borrow during the bad times, played a key part of New Zealand coming through the GFC in a much better position than many of our contemporaries.

The government has learned an important lesson from this experience and wants to rebuild that buffer for the future.   It is clear that nothing will take priority over getting the level of debt down.   Any hints of tax cuts or promises of restarting contributions to the New Zealand Superannuation Fund are foremost contingent on getting net debt down.  If the economy does better than is expected over the next few years, that extra money will go back to repaying lenders well before there is any sniff of tax cuts.

High dairy prices and low interest rates have buoyed the New Zealand economy, but at the cost of a high New Zealand dollar and the corresponding strain that puts on exporters.  The government knows that this convergence of favourable conditions (relative to the rest of the world) cannot go on forever.  They want, and need, to make sure there is still some money in the jar to cover every eventuality of the tide does turn against us.

They also know they need to keep interest rates down to keep the good times going as long as they can.  Advice to the government says any increase in spending of more than $1.5 billion per annum will be inflationary and will lead the Reserve Bank to push up interest rates faster than they otherwise would. The government is determined to do all it can to avoid that.  So spending is not going up and taxes are not coming down.  What does that leave?  Repayment of debt. 

When it comes to an election showdown over tax policy, this Budget does put a small stake in the ground.  Recent speculation has suggested the National government is warming slightly to the possibility of a capital gains tax.  Buried in the Fiscal Strategy Report is a comment that at the time of the Tax Working Group the government considered and rejected both a land tax and a capital gains tax and “the Government is comfortable with the broad structure of the tax system and has no plans for further major reforms in the near term”.   It looks like it will be only Labour and the Greens that go into the next election promising new taxes.

If not capital gains tax (the effect of which on house prices in the long term is dubious at best) what, then, is to be done about at all consuming issue of housing prices? First, tariffs and duties on building products will be removed.  This is expected to cut $3,500 from the cost of building a home.  Second, the Government wants to continue to increase supply through its program of housing accords.  While 33,500 new sections have recently come into the supply chain in the Auckland housing market, this only goes some way to addressing the lack of building over the last few years combined with combined with positive net migration has continued to put upward pressure on house prices.

New spending, as would be expected in an election year, is focused on the social sector; health, early childhood education and schools, and the collective group the government calls “families”.  New spending for this last group includes an extension of paid parental leave from 14 to 18 weeks, an increase in the amount and an extension of eligibility for the parental tax credit.   While this slightly narrows the gap between the National and Labour policies, there is still plenty of ground to fight over in the coming months.

This is the reaction from PwC:

Budget 2014: Ready to Rise 

Despite carefully managed pre-budget expectations, Budget 2014 has delivered two surprises; a surplus of $372m in 2015, appreciably higher than the wafer thin surplus expected; and when taken over a four period, higher planned new spending in health, education and welfare than was expected. 

The higher surplus despite extra spending comes as a result of a forecast of strong economic growth of 3% in 2015 rising to 4% in 2016. 

On the back of that strong economy the Government has announced it will increase new spending in future budgets at around $1.5bn a year, half a billion dollars a year more than the 2014 budget allowance of $1bn. 

Budget 2014 forecasts rising surpluses over the next 4 years reaching $3.5bn in 2018.  These surpluses are committed to future capital and infrastructure expenditure. 

Net debt peaks at $65bn and then is held their while the economy grows.  As a result, net debt is forecast to have reduced to the Government’s target of 20% of GDP by 2020. 

“We welcome the return to surplus and the forecast of future surpluses.” PwC Chief Executive Officer Bruce Hassall says.  “This enables New Zealand to reduce our debt load and rebuild buffers against unknown future shocks”. 

“New Zealand business will welcome a stable fiscal outlook that will allow the economy to grow in a controlled fashion without creating too much pressure on inflation, interest rates and the exchange rate.” 

“New Zealanders will also welcome further assistance targeted at those who need support.” 

“Budget 2014 strikes a good balance between fiscal prudence and Government spending in an economy that is ready to rise” concludes Mr Hassall.

And here is the Deloitte reaction:

Surplus a marker along New Zealand’s economic journey

What’s more important is the speed and direction of travel

Finance Minister Bill English announced his sixth Budget to the nation today, delivering an anticipated surplus of $372m. Deloitte CEO Thomas Pippos says the projections for increasing surpluses in future years are also an important part of the story.

“The lens through which Budget 2014 should be viewed is not about the anticipated surplus but about the journey, including the speed and direction of economic travel over that wider period of time. Where the economy has come from and where is it going. Will it enable us to provide for the types of lifestyles we aspire to in New Zealand – more widely, to win against the others that we are competing against?” says Mr Pippos

Through that lens, Budget 2014 should be viewed as a success or a relief, even by the most uncharitable.

“The size of the surplus trivialises a journey that has taken six years to get to and suggests that we have arrived at a destination. It’s an abstract that without context is largely meaningless. It is mischievous to look at it in any other way. Similarly mischievous is an undue focus on historic variances to forecasts. Forecasts are no more than best guesses that are incapable, at least as far as revenue is concerned, of surgical precision.”

Targeted expenditure is the theme. Further investment in paid parental leave and the parental tax credit are key examples of this.

“This is a good place to target additional spending as it goes to productivity, workforce participation and nurturing the growth of the next generation of New Zealanders,” says Mr Pippos.

Juxtapose Australia for context. Still the lucky country in many respects but over the same period they are looking at record deficits, tax increases, and expenditure cuts, to curtail (not reverse) the $50 billion deficit announced on Tuesday.

“Budget 2014 may not win the Government the re-election but it certainly won’t lose it for them either,” concludes Mr Pippos.

This is the Bankers' Association's reaction:

Budget 2014: Sound economic management pays dividends

The government’s sound economic management has begun to pay dividends said the New Zealand Bankers’ Association today in response to Budget 2014.

“The Budget shows that the New Zealand economy is on the right track with a return to a small surplus in 2014/15 and then with surpluses forecast to increase moderately in future years,” said New Zealand Bankers’ Association chief executive Kirk Hope.

“There’s no doubt that after six years of deficits the Crown’s books are improving, and this reflects the responsible fiscal management of the government, and the strength of the New Zealand economy. Overall, this is a balanced and sensible Budget.

“That said, it’s important that we take a cautious view on the state of the economy. Budget 2014 shows that the forecast surpluses in out-years remain modest at best and could easily be put at risk. 

“For that reason it’s pleasing to see the government taking a prudent approach to future expenditure and only allowing for moderate increases in government spending. This will also ensure that inflationary pressures are kept to a minimum, and that interest rates are not materially affected.

“This restraint is welcomed and it’s vital that we resist the temptation to move away from careful, cautious government spending and put undue pressure on interest rates.

“We are also pleased to see Budget 2014 projecting net Crown debt dropping to 20% of GDP in 2019/20 and with it the government committing to resuming full contributions to the NZ Super Fund.”

The Budget also contained a number of tax changes including abolishing cheque duty and adjusting tax deductibility for research and development expenditure.

“These are constructive steps and will aid economic growth. However, again we would like to have seen a stronger focus from the government on specific incentives for savings and a firmer commitment to auto-enrolment in KiwiSaver.”

Budget 2014 also continues the government’s efforts to address housing affordability through freeing up supply.

“The move to temporarily remove tariffs and duties on building products is an innovative one. Reducing the cost of building a family home should help improve the supply of housing, especially in conjunction with previous steps taken by the government to free up housing supply.

“Significant challenges remain in regards to housing affordability in Auckland and this will be an area that will require ongoing focus from both central and local government,” added Hope.

Here is the reaction from Federated Farmers:

Federated Farmers welcome return to surplus

Federated Farmers welcomes the confirmation in today’s Budget of a return to surplus.

“The projected surplus for 2014/15 might be small but if achieved it will be a great milestone resulting from a lot of hard work,” says Federated Farmers’ President Bruce Wills.

“The achievement of a surplus should not be underestimated given the impact firstly of the Global Financial Crisis and then the devastating Canterbury Earthquakes.

“Most importantly for our economy, is to have a surplus combined with continued spending restraint to take the pressure off monetary policy and therefore interest rates and the New Zealand Dollar.

“A surplus also gives us some real choices for the first time in several years, choices which our friends across the Tasman would love to have in the wake of their own Budget.  

“Repaying debt should be the most important priority, but providing the surpluses are enduring we can think about tax cuts or spending a little more. What room there is to move should be spent on things that will make the boat go faster like infrastructure, R&D, and building skills.  We can also think about restoring contributions to the New Zealand Superannuation Fund.  The Government is clearly thinking along similar lines and it’s no surprise that there is an emphasis on initiatives to help families.

“The primary sector should be well-placed to continue to drive the economy forward and we welcome the $40 million budgeted for irrigation investment, the increased funding for research and science, and $8.5 million more for agriculture tuition subsidies at tertiary institutions.  It’s good to see initiatives that will advance the primary industry.

“In particular, we welcome the $20 million in funding for freshwater and environmental initiatives. The implementation of the National Policy Statement on Fresh Water Management will be all the better for the $12 million to help councils and communities in their decision making and implementation processes, and consequently the $3 million for the  Ministry for the Environment to implement RMA reforms. 

“Although dairy commodity prices are back off their earlier highs, commodity prices overall remain strong and with Asia continuing to grow and wanting our food. With the Budget looking to invest $69 million to expand New Zealand’s presence in China, South America and the Middle East, the outlook should be good.

“That’s not to say there aren’t any clouds on the horizon.  As the Reserve Bank said yesterday, agricultural debt remains high albeit concentrated with 50 percent of dairy sector debt held by around 10 percent of dairy farmers.  These farmers could suffer from a large drop in dairy pay-outs especially if there is also a drop in land values, which could then have wider impacts across farming as well as the economy as a whole. 

“The Reserve Bank sees the fragilities in China’s financial system as a risk to commodity prices, which would impact on New Zealand.  I agree with this assessment so it is doubly important that we do all we can as a country to ensure that we minimise the risk of policy own-goals.

“With the election silly-season upon us, I am worried about anti-farming ‘dog whistle’ rhetoric from some of our politicians and proposals from some parties for a capital gains tax, an extension of the ETS to agricultural biological emissions, and a ‘resource rentals’ tax on water.

“Most of all though we need promises from all parties for continued spending restraint, and not to blow the surpluses before they’ve arrived. To stay in the black we need to act like we’re in the red,” concluded Mr Wills.