Government is saying it will keep new spending to $600 million a year

The forecasts out today look healthy, partly because global economic conditions have improved since the PREFU in August. The real test will not be the forecasts but whether the Government can actually restrict spending to the degree they have forecast.

The next four Budget Operating Allowances allow for $21.7 billion of new expenditure. The cost of the coalition agreement is $15.1 billion. That leaves just $6.6 billion over four Budgets for new spending.

This equates to a mere $660 million per year as it is cumulative. So the effective allowances are:

  • 2018 $660 million
  • 2019 $1.32 billion
  • 2020 $1.98 billion
  • 2021 $2.64 billion

So each year there is only $660 million to cover all new policies, public sector pay rises etc etc.

If Grant Robertson achieves this he will be the most fiscally disciplined minister of Finance since Ruth Richardson. The last Labour Government increased spending by around $3 to $4 billion a year. National managed to get it down to around $1.5 billion a year.

If Grant Robertson can manage to restrict new spending to $600 million a year he could go down as a great Minister of Finance. But he may not be the most popular person with the CTU.

Two other issues of interest to me was KiwiBuild and the NZ Super Fund.

Treasury has said the forecasts model $2 billion of capital spending on Kiwibuild, but that the macro-economic impact does not depend on how many houses are built – just the level of the spend. They give an example that whether spending $1 million results in two houses or three houses doesn’t matter at a macro level, but it does matter from a policy success level.  This is Treasury politely saying they are definitely not perdicting $2 billion of capital will result in 100,000 new houses. Watch this space.

Labour has made a huge fuss about National not resuming contributions to the NZ Super Fund. However Labour is not resuming full contributions until 2020 either. They’re only putting in $500 million this year and $1 billion next year. I guess they are learning the reality of a tight capital situation.

Overall the economic forecasts are looking pretty good for New Zealand. We’re better off than almost all other OECD countries. But the test will be whether the Government can actually manage the fiscal discipline the forecasts are based on.

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