Budget 2016: A disappointing forecast

Budget 2016: A disappointing forecast
Minister English has presented a budget that aims to invest in a growing economy. The Treasury forecasts indicating real GDP growth of 2.9 percent for the year ahead, and 2.8 percent per annum to June 2020, are indeed promising.

The Minister’s speech also focused on a “rising surplus, falling debt” and the options that this provides families as well as the Government in terms of investment decisions.  Part of his speech focused on the “reprioritisation of lower-value spending” and “an additional $480 million per year of new spending” due to these “savings”. 

The additional spending is being directed towards “addressing the long-term drivers of social dysfunction” through a social investment fund, as well innovation, science, and education and training.

Headlining the speech is the Innovative New Zealand package. This is new spending of $761.4 million over a series of 25 initiatives.  These are focused on science and innovation, skills and tertiary education, and regional development.  Minister English noted in his speech that this is a package to “encourage entrepreneurship, skills and economic growth”.  In summary, the package includes:

  • $410.5 million for science and innovation – taking the Government’s annual science investment to $1.6 billion by 2020.
  • $256.6 million for more tertiary education and apprenticeship programmes - particularly in the areas of science, engineering and agriculture.
  • $94.4 million to support regional economic development with initiatives to “unlock business opportunities and benefit regional communities.”

Under the science and innovation spend things of note include increased funding for the Endeavour Fund (previously the MBIE Contestable Fund); for the Marsden Fund; and a new “Strategic Science Investment Fund”.  This fund is basically a whole lot of “strategic investment funds” being brought together into one to create a new fund.  However, it should be noted that this funding used to be the “Core funding” for the CRIs.

Others such as the Health Research Council and Antarctica NZ continue to get support.  However, a new Maori Innovation Fund may be of interest.  The Maori Innovation Fund gets $4 million over four years to “help more Maori enterprises gain the skills, knowledge and networks they need to get new ventures off the ground and grow existing businesses and asset bases.”

Under the Tertiary Education, Skills and Employments spend the focus is on subsidies in education such as agriculture, engineering, and science at degree level and higher, along with education subsidies for advanced trades.  At a more detailed level this results in:

  • $86.1 million over four years for tuition subsidies – these are targeted at degree level and above and focused on subjects such as science (broad definition here), agriculture, veterinarian science and undergraduate medicine.  This funding is to encourage providers to offer these science and technology subjects through “targeted tuition subsidy increases”
  • “Support” for 25 to 34 year olds through “sub-degree subsidises”.  The aim here is to encourage people to do advanced trade qualifications, as well as move from a level 3 qualification to a higher level diploma or degree.  Again, the focus is on “tuition subsidises”

Encouraging the international connections that New Zealand students have, has also received funding and a focus.  In particular an allocation of “$43.5 million over four years for initiatives to help more New Zealand students develop international linkages and connections.”

Regional development is also set to receive $94.4 million of new funding over four years.  Minister English stated that this was “targeted support to help meet the needs of a growing economy”.  The National Cycleway has again received funding - $25 million for upgrades - “communities” get $12 million for toilets and carparks.  Regions such as Gisborne, Marlborough and Taranaki get new capital funding for previously announced roading projects but that’s it for “key transport projects”.

Other priorities for new spending include: health (to keep up with population growth and ageing); a new IT system for IRD; a myriad of social spending initiatives; and justice spending (of which a sizable bite is taken up by forecast growth in the prison population).

Disappointingly, especially in light of the Budget’s tag line of ‘Investing in a growing economy’, the government’s new capital investment spending allowance has actually been trimmed.  Much of the new investment is in school buildings – arguably more catch up than improvement.

And the end result is a similarly disappointing forecast in our overall economic potential – which remains stuck at a modest 2.7% growth rate over the coming years.  Consequently, despite a strong economy (and a government surplus), our external deficit of $8.7bn in the 2015/16 year grows to $14.4bn for 2019/20.  Consequently, the nation’s net international indebtedness is set to worsen – from currently 61% of annual GDP to close to 69% by 2020.

Dr Ganesh Nana is chief economist of Business and Economic Research Limited (BERL)