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Good budget, but growth expectations remain low

Tony Alexander

The Finance Minister released the government’s annual Budget today. which for the uninitiated is basically an accounting exercise in which spending is offset against revenue streams to produce projected deficits or surpluses, along with lots of information on debt levels and financing, the outlook and plans for the next ten years, and assessment of risks facing the government accounts along with an updated outlook for the economy from Treasury.

The Budget also contains details of new policies, though it has been the practice for perhaps a couple of decades now to announce almost all new spending measures in the weeks leading up to the late-May event. Surprises tend to be few and far between, though last year’s boost to benefit levels was an unexpected development.

Interesting package

As a macroeconomist my interest is not in the minutia, important as hundreds of things are to particular groups, but the overall package and whether it suggests a different outlook for the pace of growth in employment, GDP, inflation, interest rates, housing, and the robustness of the government’s accounts.

In that regard, while the likes of the already announced tax changes for SMEs and money for hi-tech start-ups are wonderful and at the margin will make running a small business easier in New Zealand, they don’t justify lifting growth expectations unless you are silly enough to deal in growth numbers two out from the decimal point. The same goes for extra funding for apprenticeships, health research, tourism, and so on. All good stuff but no game-changers.

Budget boosters

Nonetheless, the Innovation New Zealand package of an extra $761 million in operational spending over the next four years is positive, as is the Public Infrastructure Package totalling $697 million.

The Health package is the biggest of the four packages getting an extra $2.2 billion over four years, with the final package being the Social Investment Package which gets $641 million. Capital spending for the Public Infrastructure Package adds another $1.4 billion.

The measures announced with give a small positive fiscal impulse to the economy this year then small negatives after that, but with none of the numbers being large enough to alter the positive outlook which we and Treasury have for the economy. They see GDP growth in the coming years of 2.9% for the year to June 2017 then after that 3.2%, 2.8%, and 2.5%. They see no tightening of monetary policy until the 2018/19 year and the unemployment rate trending down to 4.6% come 2020.

Fiscal surpluses as percentages of GDP are projected at 0.3% for 2015/16, then 0.3%, 0.9%, 1.7%, and 2.2%.

Housing Issues

It is popular amongst those who fail to understand the factors pushing Auckland house prices higher and/or have for years incorrectly predicted big declines, to blame speculators for the surge in prices.

However, grouping all investors into the speculators’ camp gives an incorrect guide to the true make-up of the many people purchasing properties to rent.

The results of a survey by Mortgage Choice in Australia were released this week showing that whereas two years ago 20% of people buying investment properties were first home buyers now the proportion is one-third. These ‘rent-investors’ have become a key driving force behind parts of the Australian housing market and we suspect that the same is happening in New Zealand going by anecdotal reports.

It seems reasonable to assume that these rent-investors are not in it for a quick capital gain but a medium-term hold in order to build up a bigger deposit from anticipated price rises and principal repayment and enhance flexibility in their work location early in their career – as in not being tied down to one place through home ownership which can reduce effective functioning of the labour market.

Elders with cash

Another group of we suspect long-term holders is older people who have built up cash assets which they are looking to invest in order to earn more than simply leaving the money in the bank. These investors have above average deposits so are not much affected by deposit size rules and they are not speculating in order to earn a lump sum which will then go back into a bank to earn very little. They want something which will yield income over a long period with reasonable chance of capital gain. Maybe some will buy an investment property with their offspring.

Then there are the people acting on warnings about the need to build wealth for retirement by doing exactly that in the form of housing assets. These are also quite likely long-term investors. Plus there are the people who are pursuing housing investment as a business.

Auckland is where over one-third of New Zealand’s population want to live. And just like farmers who with open eyes accept the challenges thrown up by their land, weather, animals, markets, pests and diseases, these Aucklanders knowingly accept the challenge of managing dense traffic, high house prices, and high numbers of people per household.

For your guide, the Budget contained an extra $100 million to free up Crown land for development, extra assistance for social housing, and a warning to councils.

In his Budget Speech the Finance Minister referenced something called the National Policy Statement on Urban Development which is ‘upcoming.’

“This will direct councils to allow more housing development where necessary and to measure the impact of their decisions on house prices.”

Tony Alexander is Chief Economist at Bank of New Zealand.

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