Treasury's pre-election fiscal update throws a curve ball at Election 2017; Better government position in 2016/17 to be nearly washed out by weakness through to 2020; Joyce rules out more tax cuts until 2020; What will Labour do?

By Alex Tarrant

A one-off sugar hit then a bit of a damp squib.

Treasury’s much anticipated pre-election fiscal update has thrown a curve ball to the election campaign, with a set of forecasts that could best be described as a headache for Labour while giving National the ability to tout its ‘steady as she goes’ approach.

The results indicate Labour may have to lean towards announcing a higher top income tax rate if it wants extra revenue for new spending promises under Jacinda Ardern – particularly if it wants to bring forward its three years free tertiary education policy as Ardern indicated on Tuesday. Labour finance spokesman Grant Robertson put out a 'holding pattern' statement after Prefu was released - you can read it below.

Finance Minister Steven Joyce meanwhile told media at the Treasury lock-up Wednesday that the numbers meant any second ‘family incomes’ package would be on hold until at least 2020, unless growth came in ahead of projections. National would not entertain extra borrowing to allow for earlier tax cuts following on from the heels of its Budget 2017 families package, he said. See more from Joyce on a 2020 tax package below.

National on the campaign trail will indicate how some of the unallocated capital spending of $4bn over the next four Budgets is set to be spent – although not all would be allocated, leaving room for promises over the next few years, Joyce said. This also effectively leaves some cash aside for coalition negotiations.

Meanwhile, of interest to Interest.co.nz readers will be that, Treasury, in the few months since its previous forecasts were published in May, is now expecting residential investment (ie house building) to be lower than previously expected, as capacity constraints hit building plans.

But first, the good news. The government’s operating balance before gains and losses (OBEGAL) for the 2016/17 fiscal year is expected to come out $2bn above forecast in the May Budget at $3.7bn.

That could provide for a nice Election 2017 policy sweetener from each of the two main parties. However, Joyce said he didn’t expect to be doing too much with the kitty, as it was effectively washed out by lower projections for later years.

Now the bad news. That strength in tax revenue in 2016/17 isn’t expected to stick around – it was boosted by “one-off” factors last year, Treasury says. This means the Crown’s OBEGAL surpluses from 2019 through 2021 are forecast to be a cumulative $1.7bn lower than expected in the May Budget.

This does still leave a $400m boost from the higher than expected 2016/17 tax take – not really the funds some were expecting before the Prefu figures were released, but at least some cash to do something with if you don’t want to rock the debt-to-GDP or income tax settings boat.

EY Executive Director, Tax, David Snell said Treasury had called an increase in corporate tax revenues over the past year as a one-off rather than a structural change. “Most of the income has come from the finance and investment sector – they’re notoriously volatile. I can understand where [Treasury] is coming from on that," he said.

These institutions included banks, investment houses, and the New Zealand Superannuation Fund, which is a big corporate tax payer. “It will be a bold call to sustain it [in the forecasts] when you’re facing capacity constraints and you’re facing changes in monetary policy over the coming period,” Snell said.

Because of the higher-than-expected revenue in 2016/17, the government’s revenue base is starting higher than was expected in May. This feeds through to its net debt to GDP ratio tracking slightly better over the next four years – Treasury is effectively assuming that extra $2bn in 2016/17 is all put towards paying down debt.

This could be where Labour is able to find a few billion for each year of the period – by sticking with its own previous debt track – they’ve already promised to get net debt to GDP back to 20% a year or two later than the Budget projections. Much of that is already incorporated into Labour’s fiscal plan, which the party has said it will review based on the Prefu numbers.

The Crown’s residual cash position looks set to be slightly stronger than Budget projections – although still in deficit in 2018 and 2019. This is the figure leading to Joyce’s comment that National wouldn’t want to announce any second ‘families package’ until the cash position is back in surplus ($1.7bn) in 2020. We’ll hear more from National on the campaign trail about this potential package, Joyce said.

Meanwhile, nominal GDP is expected to track pretty similar to the May projections – slightly under, but not so much of a difference as to cause any worry, Treasury said.

However, real GDP is forecast to come in lower than projected in May. A higher terms of trade over the next four years will essentially be offset by lower-than-expected residential investment, the figures show. Treasury has also built in higher than expected CPI inflation every year from 2017 through 2020, which impacts on real GDP forecasts.

Treasury secretary Gabriel Makhlouf outlined Prefu's key projections. Watch his presentation below:

Meanwhile, Steven Joyce later put out a press release detailing National's committment to a second 'families income package' from 2020, including what might trigger National to bring it in earlier:

The National Party will commit to implementing a further Family Incomes Package in the next term of government, subject to certain fiscal conditions being met, Finance Spokesperson Steven Joyce says.

“Our strong economy means the Budget 2017 Family Incomes Package will provide a positive boost to after-tax family incomes on 1 April of next year,” Mr Joyce says.

“We are committed to delivering more for New Zealand families in the next term of government, subject to maintaining our strong plan which is allowing New Zealand companies to compete and succeed on the world stage.”

“The best indications from today’s PREFU announcement is that a similar sized Family Incomes Package to the current one would be possible from 2020, unless the economy performs better than expected,” Mr Joyce says.

The first Family Incomes Package will deliver an average of $26 a week to 1.34 million working families from 1 April 2018 through a combination of tax threshold changes, increases in Working for Families tax credits, and increases in the Accommodation Supplement. The Package will also provide an additional $13 a week per couple for 750,000 superannuitants.

Mr Joyce laid out a number of key conditions to be met for a second Family Incomes Package to proceed. These are:

Maintaining the Government’s debt targets of reducing net debt to 20 per cent of GDP by 2020 and 10-15 per cent of GDP by 2025

Meeting the Government’s spending commitments and forecasts for building infrastructure and improving public services laid out in Budget 2017.

Funding any Family Incomes Package from cash surpluses and not from additional borrowings

The Pre-election Fiscal Update showed that cash surpluses beyond current and future budget spending commitments would commence from the 2020 financial year.

Mr Joyce says that a second Family Incomes Package would have a similar emphasis to the first package that commences 1 April next year.

“We would want to focus particularly on lifting the incomes of low to middle income families, look to simplify further the tax and transfer system so people can more easily see the link between their work and their earnings, and continue to lift the lower tax thresholds as incomes grow,” Mr Joyce says.

“The average wage is predicted to grow from $58,900 at March 2017 to $65,700 over the next four years. It is very important that we aren’t taxing middle income earners at 30 cents in the dollar. ”

“National has shown it can lift incomes and invest in public services and infrastructure. Under our responsible programme we can continue to do both.”

Mr Joyce said that the ability to have an ongoing conversation about boosting family incomes is only possible because of New Zealand’s strong and growing economy.

“Whether it’s investing in better public services, investing in infrastructure, or boosting family incomes, every budget initiative is only possible because our small and medium-sized businesses operate in an economy that allows them to compete successfully on the world stage.

“It’s crucially important that keep encouraging them to compete and succeed and not weigh them down with poorly thought through new taxes and polices that would stall the economy and stunt growth,” Mr Joyce says.

Labour finance spokesman Grant Robertson:

The Government accounts revealed in today’s Pre-Election Fiscal Update (PREFU) show a National Party drifting along as economic growth stalls and productivity stays flat, says Labour’s Finance spokesperson Grant Robertson.

“Growth in our economy is being propped up by rapid population increase and Kiwis working longer and longer hours. That is not sustainable. We can do better than this. We need a government that does more than drift along, but has the drive to lift productivity and wages.

“The Pre-Election Fiscal Update shows lower per person growth and lower productivity than expected over the next three years. Exports are static. In this year, Kiwis’ wages will not keep up with inflation. Overall, wages as a share of the economy are projected to fall. We are falling behind other countries; our unemployment rate is now higher than the UK and the US.

“Once again, while the top line numbers might look healthy, just below the surface this is an economy that is not sustainable and is not giving all Kiwis a fair share in prosperity.

“Labour’s plan for the economy is built around building decent jobs with higher wages. We know that the key to doing this is lifting the skills of our workforce, investing in research and innovation and supporting our cities and regions to grow.

“The update also shows National cutting $600m of capital investment this year, including a $200m cut to the City Rail Link. This shows a lack of commitment to the modern transport infrastructure required to allow our largest city to grow.

“With the housing sector forecast to stall, well below the numbers of new houses we need, and exports are falling as a share of the economy, National’s lack of a plan is laid out in black and white.

“Labour has been clear through our Budget Responsibility Rules and our Fiscal Plan that we will manage the economy responsibly, while making the investments that are urgently needed in health, housing, education and lifting children out of poverty.

“There is much to do to build a better New Zealand, and that must be our priority. Now is not the time for tax cuts that give hundreds of millions of dollars to the wealthiest New Zealanders,” says Grant Robertson.