Budget 2021: Spend or Save? Finance Minister’s dilemma

“Our expectations are low. And they’ll be met,” says Alan McDonald, head of advocacy and strategy at the Employers and Manufacturers Association.

“Grant [Robertson] seems to be signalling an austerity type Budget and where he is talking about spending money – which is education, health and beneficiaries – that’s their core stuff, not ours.”

It’s a blunt but succinct preview of the 2021 Budget from a business leader under no pressure to be politically diplomatic.

Robertson, to be fair, completely rejects suggestions that this will be an austerity Budget.

He is emphasising a balanced approach to what he says is still very much a Covid recovery Budget.

What McDonald alludes to, though, is that the balancing act will see the Finance Minister tighten the timeline for debt repayment and move to reduce deficits.

Robertson has been up-front about the fact that the focus for new spending will be heavily targeted towards addressing poverty and inequality.

“We have to be realistic,” says McDonald on the chances of any Budget treats for business.

“Over the Covid period they have pumped fairly large amounts of cash into supporting business.”

It has mainly been on the employee side, he notes.

“But they have done quite a bit for the employer. So to be fair it’s probably a case of: business has already had its drink.”

That’s not to say that business doesn’t have a wish list – just that the list now revolves mostly around policy decisions rather than new spending.

At a business breakfast hosted by Deloitte and BNZ last week, Robertson confirmed what the Crown accounts have suggested for some time: he does have money available to make some big calls on both spending and debt repayment.

And he seems deeply committed to doing a bit of both – even if that leaves him vulnerable to accusations of under-delivering from both ends of the political spectrum.

In a speech that leaned heavily on the word “balanced”, Robertson reassured his audience thathe would “not implement austerity measures in order to try to reduce our levels of debt before the recovery is secure.

“We have seen internationally the toll that cuts to social services take on the most vulnerable in society, and how social capital can be eroded by a country attempting to cut its way to some particular numerical goal that is divorced from the economic realities of that country,” he said.

Yet he cautioned that as part of his “balanced approach … not all of our manifesto commitments will be able to be funded within one Budget”.

In other words, issues like child poverty, housing and climate change are not going to be solved next Thursday, May 20.

“There is a bit more space in our operating and capital allowances to support the recovery focused on the areas where we can accelerate progress and in tackling our long term challenges,” he said.

“At the same time there is some more scope to keep a lid on debt and look towards a faster reduction in that debt once the recovery is secure.”

Robertson has been wary of putting numbers on things ahead of the big day.

But early this month his own press release, acknowledging stronger than expected Crown accounts, offered some clues to how much scope he has.

In it he highlighted the fact that the operating balance before gains and losses (OBEGAL), was $5.2 billion better than forecast in Treasury’s half-year economic and fiscal update (HYEFU).

Tax revenue was $69.9b – $4b above forecast – due to higher than expected corporate and income tax, and GST revenue.

Net core Crown debt was 33.3 per cent of GDP, $6.6b less than forecast.

ANZ senior economist Miles Workman agrees with Robertson’s claim that this is not an austerity Budget.

“The Government is choosing to slow the return to surplus because it is trying to focus on some of these massive issues with food banks and child poverty and some really nasty social outcomes that are hurting the poorest of the poor,” he says.

“We’re not running zero Budgets anytime soon, as we did after the GFC.”

But any extra headroom the Finance Minister has needs to be viewed against the almost $120b increase in projected net debt (to 2023/24) that we have committed to.

“It’s inevitable and entirely appropriate that the Government’s stimulatory fiscal stance fades”, says Workman.

“While that amount of debt accumulation represents a lot of saved jobs and livelihoods, it also represents a need to remain focused on fiscal consolidation so that the Government has the ammunition it will need to respond to the next inevitable crisis.”

Unfortunately, that consolidation can only be achieved with higher taxes and/or fewergovernment services.

But it is also true that good fiscal gains have been made as the economy outperformed expectations and that does offer some scope to make choices, he says.

Workman highlights the fact that GDP forecasts to 2025 are now up by an estimated $70b since the HYEFU.

That’s likely to deliver the Government an additional $3 billion a year in tax revenue, on average across that period.

There is also the $926 million that Robertson recentlypulled back into the Covid Recovery Fund from allocations that weren’t spent last year.

And the fund itself sits at close to $10b – money which has been accounted for by Treasury but not yet allocated.

Workman says he’d expect that to remain largely untouched for now, given that we are still not fully clear of lockdown risk.

But even if Robertson significantly lifts the spending cap on operating and capital allowances, there is just “no reasonable way” that next week’s Budget can match the stimulus that was unleashed last year, he says

So regardless of how it is framed politically, it will represent a step back in government spending.

Based on Treasury’s preferred measure – the Fiscal Impulse Index – economists will view its direct influence on GDP growth as negative, he says.

“But the key thing here is not about how much fiscal policy is or is not adding to
headline growth, but whether or not additional macro -stimulus is actually needed,” Workman says.

“And in our view, it’s not.”

That’s largely because the economy is already bumping up against capacity constraints like labour shortages.

So pouring in extra cash for its own sake won’t generate productive growth, just inflation.

What’s really needed to unlock growth now is not more spending money, it’s deft policy making, Workman says.

So on issues like housing, the emphasis now needs to be on policies and regulation which open up supply, he says.

Of course, that’s not necessarily something we should expect on a Budget day.

The EMA”s McDonald agrees.

He’s still hopeful we’ll see some business friendly policy calls – although he’s not holding his breath for much progress next week.

One area he’d like to see targeted is immigration, which has become a huge issue for employers struggling to find staff.

There’s a broad policy review underway and no bigcalls are expected in the short term.

But more money in the Budget to assist Immigration NZ with what’s already on the table would help, McDonald says.

“There’s over $3b [of potential investment] sitting in the investor immigrant queue,” he says.

“They’re people with visas and $10m they’ve got to spend. We could use that to direct into some of the industry transformation plans that are floating around.

“Immigration either needs to be better resourced or digitised tomorrow, they’re still running around with bits of paper.”

There is also scope for more regional development and investment, McDonald says.

“The Provincial Growth Fund seems to be – if not dead – certainly not high on the agenda.

“That doesn’t mean regions don’t still need a boost.”

While he doesn’t have high hopes, McDonald would also would like to see the Governmentlooking at both corporate and personal tax rates.

“I’m not saying revisit the 39 cent top rate. But there is case that if you want to put real money in people’s pockets then shift the lines for the lower end of the scale.”

And with businesses facing massive cost increases due to new labour laws and rising wage bills, he’d like to see something back in the other direction: “with a real focus on productivity”.

The EMA sees increases in the ability to claim back tax on depreciation as one way to do that.

“That will encourage people to invest in skills, technology and software raising productivity. And with higher productivity you get that virtuous cycle of being able to raise wages.”

Related to that is a need for R&D tax breaks to be more readily available, he says.

“That 15 per cent tax exemption is so hard to access people are hiring the ‘big four’ accounting firms to make the case.”

By the time they’ve paid the bill they’ve just about negated any benefit, he says.

The Callaghan Innovation Fund also remains difficult to access.

Even if they were to just make temporary changes to relax the parameters, these things could really turbo-charge productive economic growth, he says.

Beyond that business will be looking for more evidence of “a big joined up plan”, says McDonald, who remains sceptical that we will see one.

“We’re looking for more cohesion, the issues are inter-related. So a direction or a plan, something that deals with the overarching direction.”

Ultimately that may be the real point of Budgets these days.

With Crown accounts updated regularly and big policy announcements spread out across the year, Budgets aren’t the dramatic reveals they were in the 1980s.

But they still provide a platform for Finance Ministers to lay out their vision and set the agenda for the coming year.

Robertson seems determined to walk a moderate path between spending and saving.

Does he still have something big and bold up his sleeve to grab headlines with this Thursday?

If he does, he is determined not to let it slip.

“There’s always something new on the day,” he says.”I don’t want to over hype anything here. I’m always excited about Budgets.”

“We’re taking about,” he says – you guessed it – “a balanced approach.”

Source: Read Full Article