New Zealand Leaves Door Open to Tax Cuts as Surplus Grows

  • Government forecasts larger, growing surpluses through 2020
  • English: ‘Rising surpluses show that there are more choices’

New Zealand’s government has left the door open to dangling tax cuts at next year’s election after projecting larger and growing surpluses in its latest budget.

The operating surplus will be NZ$719 million ($484 million) in the year ending June 30, 2017, compared to the NZ$356 million projection made in December, Finance Minister Bill English said Thursday in Wellington. Surpluses in 2018 and 2019 will also be larger than projected less than six months ago as the economy grows faster than expected.

English’s boss, third-term Prime Minister John Key, won re-election in 2014 promising income tax cuts if economic and fiscal conditions line up. While budget surpluses are currently earmarked for debt repayment and policies to lift economic performance, there may yet be scope for Key to take a tax reduction pledge into next year’s election campaign.

“Rising surpluses show that there are more choices,” English said as he briefed reporters ahead of his eighth budget. “We made the decision in this budget there wasn’t room for tax cuts. Those are decisions for the future.”

The government projects a NZ$668 million surplus in the current year ending June 30 compared to a NZ$401 million deficit projected in December. There will be a NZ$2.5 billion surplus in 2017-18, rising to NZ$5 billion in 2019 and NZ$6.7 billion in 2020.

Kiwi Rises

The New Zealand dollar rose following the report, buying 67.25 U.S. cents at 2:38 p.m. in Wellington, compared with 67 cents prior to its release.

English, who delivered the first surplus in seven years in 2015, has said the government is less concerned with “minor overs and unders” in the budget balance and more focused on repaying debt. Core government debt will fall to 24.9 percent of GDP in the year ending June 30, less than the 26.9 percent projected in December.

The government borrowed heavily to maintain public services and welfare payments after the global financial crisis, then to fund the recovery from devastating earthquakes that hit Christchurch in 2010-11. Debt has climbed from as low as 5.5 percent of GDP in 2008.

Debt will eventually fall to 19.3 percent of GDP by 2021, English said. That will allow payments to resume to the state pension fund that year, two years earlier than previously expected. Better-than-projected economic growth has offset stubbornly low inflation to increase the overall size of the economy, boosting tax revenue.

At the same time, record immigration is increasing pressure on hospitals, schools and other public services. The nation had 68,110 more permanent arrivals than departures in the year through April.

English brought forward NZ$600 million he had allocated for next year’s budget to deal with pressure from population growth and to develop new policies. He’s also used NZ$400 million from next year to speed up debt repayment. As a result the allowance for new spending in Budget 2017 will fall to NZ$1.5 billion from NZ$2.5 billion previously planned.

There is no provision in the forecasts for tax cuts. Key last week said cuts may still be included in next year’s budget, or the general election campaign later in 2017.

New Houses

More money will be directed toward developing as many as 2,000 houses on surplus government land in Auckland, in an effort to reduce pressure on prices, English said.

New Zealand house prices in April were 37 percent higher than the previous peak in 2007, according to Quotable Value data. In Auckland, home to a third of the nation’s 4.5 million people and the most popular destination for new immigrants, prices have surged 72 percent in that period.

New Zealand is reaping the benefits of a diversified economy even amid challenging times for the nation’s dairy farmers, English said. Another 170,000 jobs are forecast by 2020 and average wages are projected to rise, he said.

The Treasury Department forecasts GDP growth will accelerate to 2.9 percent in the year through June 2016 from 2.3 percent a year earlier. Growth is projected to pick up to 3.3 percent in 2017-18 as dairy prices recover and farm incomes lift. Inflation will accelerate to 2 percent by mid-2017, the Treasury said.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE