Business as usual with surprises

The Budget which was expected to be boring was a business as usual one with surprises.

The business as usual bit is continuing focus on the careful management of public money and getting back to surplus without the slash and burn approach which past governments took.

The big surprise was an increase in benefits, above the normal adjustment for inflation, for the first time in more than 40 years.

Even the opposition was struggling to oppose that and balancing the increase is the requirement for sole parents to seek work once their youngest child is three and increased work obligations for those on job seeker benefits helps.

Dene Mackenzie says Bill English has pulled off a master stroke:

He pushed his political opponents off stride by announcing social spending better than anything Labour did during its most recent nine years in Government.

Mr English will continue to be criticised by opponents for not delivering his prized surplus this year, but spending $790 million on a package to help children in some of New Zealand’s poorest families was a touch of genius.

The package included more child-care support for low-income families, a $25-a-week increase in benefit rates for families with children, an increase in Working for Families payments to low-income families not on a benefit, and increased work obligations for sole parents on a benefit.

”This package strikes a balance that offers more support to low-income families with children while ensuring there remains a strong incentive for parents to move from welfare to work,” he said.

He also made it difficult for his political opponents to make any meaningful criticism by lifting benefit rates by more than inflation for the first time since 1972.

The Finance Minister has always been the social conscience of National, right from the days when he was a member of the party’s ”brat pack”.

At political conferences more than 20 years ago, he talked about ensuring a ”truck driver” from Balclutha could earn enough to feed and house his family. . .

The increase to Working for Families at the lower end of income ensures the truck driver and any other parents in paid work will be better off than those on benefits.

I don’t support WFF for families earning well above the average income but can’t think of a better way to ensure there’s a decent gap between income from benefits and low paid jobs.

The Budget at a glance is here.

I was listening to talkback on my way home from Christchurch last night. The cut in the $1000 kickstart for Kiwisaver wasn’t popular but it was less likely to go to those who’d need it most and tax credits and employer contributions remain.

Border security and the risk of biosecurity breeches is of increasing concern with more travellers. Requiring $6 from departing travellers and $16 from incoming ones is a little bit of user-pays.

The Finance Minister’s speech is here.

. . . New Zealand remains one of the faster-growing developed economies, with conditions supporting sustained solid growth, forecast at 2.8 per cent on average over the next four years.

Growth matters. It means more jobs, higher incomes and opportunities for families to get ahead.

By mid-2019, the number of people in work is expected to rise by another 150,000 and the unemployment rate to drop to 4.5 per cent. The average wage is also expected to rise by $7,000 to $63,000 a year.

New Zealand’s positive economic performance, relative to others, is demonstrated by the strength of the New Zealand dollar and the very low number of people leaving for Australia – the lowest, in net terms, since 1992.

Lower dairy prices are a headwind for growth, however, and global uncertainties remain. Monetary policy easing in other countries is helping to keep upward pressure on the exchange rate.

Unusually, given our current growth, New Zealand is experiencing very low inflation.

Annual CPI inflation is only 0.1 per cent, compared to the Budget 2014 forecast of 1.8 per cent.

This is good news for consumers and workers because their income goes a bit further and they get good value for any pay rises.

Low inflation is also keeping down interest rates. The concerns I expressed in last year’s Budget about rising interest rates have largely disappeared.

But lower-than-expected prices also mean that nominal GDP – the size of the economy in dollar terms – is not rising as quickly as previously expected, despite solid growth in the real economy.

This means tax revenue is not rising as quickly either.

Compared to what was forecast in last year’s Budget, nominal GDP is expected to be $15 billion lower in total over this year and the next three years, and tax revenue to be $4.5 billion lower in total over the same period. . .

Government’s fiscal priorities are:

Returning to surplus this year and maintaining surpluses in the future

Reducing net debt to 20 per cent of GDP by 2020, including repaying debt in dollar terms in 2017/18

Further reducing ACC levies

Beginning to reduce income taxes from 2017, and

Using any further fiscal headroom to reduce debt faster.

The Government is making good progress on all these fiscal priorities.

While expenditure is firmly under control, tax revenue – as I mentioned – is not rising as quickly as expected.

This is lowering operating balances across the forecast period, compared to Budget 2014 predictions.

But the overall trajectory has not changed. We have come from an $18.4 billion deficit four years ago to seeing steadily rising surpluses into the future.

A deficit of $684 million is now forecast for 2014/15, which is $2.2 billion better than last year’s deficit.

A surplus of $176 million is expected in 2015/16, followed by $1.5 billion in 2016/17 and rising to $3.6 billion in 2018/19.

As I’ve said previously, the Government has no intention of making spending cuts simply to chase a surplus in a particular year.

The surplus target has been successful in applying greater discipline to government spending.

That discipline has turned the Government’s books around, and the fiscal outlook remains very positive. . .

The government can, and should, control its spending and the disciplined approach to it that has been taken since National came to power in 2008 is the major reason New Zealand is doing as well as it is.

The government can influence the environment which helps the income side, but sustainable growth comes from the private sector.