Budget Comments

The budget was very much as expected, and therefore a bit of a non event (albeit an important non event!)

Firstly I guess it didn't contain too many surprises and therefore is unlikely to unsettle people / the markets.  It was also fairly conservative and fiscally responsible which is what we expected.

Debt levels were clearly a key focus of the budget with many of the decisions reflecting the Government's desire not to unnecessarily increase Government debt and to over time bring this back under control.  As one of my staff members said; the Government's budget was similar to his personal budget, looking to cut unnecessary expenditure and reduce debt.  A prudent approach in the current environment.

While one of the budget themes was to lift productivity, improve competitiveness and sharpen New Zealand's future economic performance, there was little substance to achieving this ideal.  Maybe that is just the reality of delivering a budget when finances are tight.  You couldn't not say that, but if there are not many funds available you can't throw cash at projects to achieve that.

There will always be the trade off on borrowing now to fund proposed expenditure and keeping debt levels under control.  The Government has obviously favoured the latter with its decision to suspend contributions to the Superannuation Fund, something which, while criticised by Labour, seems appropriate.  You wouldn't find many households with large mortgages borrowing in the current environment to invest, particularly where the return on that investment may be less than the cost of borrowings. What was perhaps surprising was how long those contributions might have to be suspended for (11 years!!).  Infrastructure spending, be it broadband, highways and rail, do however still feature, and while it could be suggested this is about lifting productivity I believe the more immediate focus is to provide economic stimulus to cushion the impact of the current recession.

It is interesting that the budget, despite the focus on debt, still makes extra funding available in health, education, and law and order, as well as confirming no change to current entitlements to superannuation.  I'm guessing the Government still want to be seen to be investing in these areas despite the tight financial situation.

I was also surprised at the suggested levels of Government spending in future budgets.  In particular the Minister of Finance signalled that new spending allowances in future years will only grow at 2%.  Given 2011 will be an election year it will be interesting to see if the Government can keep this promise coming up to a general election.  This would certainly demonstrate fiscal restraint.

The deferral of the 2010 and 2011 personal tax cuts was not unexpected, but would not have been a decision the Government made lightly.  This will undoubtedly disappoint some, however I think most will regard it as prudent in the current environment.  To have proceeded with these tax cuts would have significantly increased the risk that the cost of borrowing in NZ would have risen and this would impact negatively on all home owners.

So on balance I think most would not be surprised by this budget and while it might have been nice to see more new initiatives or new spends, most would be realistic enough to know that in the current environment that was not appropriate.

When I reflect on my pre budget predictions, I think the Minister of Finance covered all the areas I expected, and with the balance / restraint that I considered appropriate.  For this reason I think the budget met my expectation, now after that slight distraction we can get back to focusing on our core business knowing that while Government policy broadly supports us in doing that, there is still plenty of hard work to be done by us individually.

Michael Turner
Partner

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Last updated: 29th May, 2009 | 9:13 am