Published in The Australian Financial Review (Sydney), 27 May 2016 (PDF)
If there is one art Prime Minister John Key’s New Zealand government has mastered, it is expectation management.
So for its eighth budget, delivered yesterday, expectations were low. Hence nobody was disappointed when Minister of Finance Bill English delivered it.
Which is not to say that it was a bad budget. Far from it. Budget 2016 continued a tradition of no-frills, no-nonsense and no surprise budgets.
Then again, that is what you would expect from a third-term government riding comfortably in the polls. There is no need to throw in too much gimmicky stuff when the substance is solid.
The bottom line is this: New Zealand has left the twin fiscal emergencies resulting from the global financial crisis and the Canterbury earthquakes behind.
The Key government expects economic growth of 2.8 per cent for this year, a budget surplus of $NZ 700million ($652 million) – rising to $2.5 billion and $5 billion in 2018 and 2019 – and unemployment of 5.6 per cent to fall to 4.6 per cent by 2020. These are good figures, and the contrast with Australia’s projected deficits is stark, especially considering New Zealand plunged into deficit only a year before Australia, and suffered a recession.
Most of the credit is due to English. The minister is not just one of New Zealand’s most experienced politicians. He combines this experience with intellectual curiosity to find more efficient ways of delivering public services. He also thinks in time frames far longer than election cycles.
Over the past years, English had made it his personal quest to return the budget into the black. To achieve that, he did what all good finance ministers do. He kept a close eye across the entire range of government spending and made it difficult for his cabinet colleagues to demand big increases.
Having delivered this budget surplus is no mean feat. But good fiscal management and economic policy still requires more.
To be clear, the New Zealand budget did not disappoint because nobody expected much from it in the first place. But it is still a missed opportunity.
That is not just because there were no tax cuts announced or even just signalled. Total new spending for 2016/17 was $NZ 1.9 billion.
Given that amount, it might well have been possible to consider a minor income tax cut –or at the very least measures to address tax bracket creep.
Also, New Zealand’s top rate of income tax kicks in at just $NZ 70,000 per year. It is hard to argue that someone earning this amount is a top earner when the average wage is projected to hit $63,000 this year.
Then again, New Zealand’s highest income tax rate only stands at 33 per cent, which should make Australian taxpayers weep.
And,of course, New Zealand’s next election is still more than a year away. Politically it makes much more sense to deliver tax cuts at a time that allows voters to remember it. This is to say that Kiwis might still see a tax cut after all – but only in a year’s time.
The real omission in yesterday’s budget has nothing to do with tax rates. It is the Key government turning a blind eye to New Zealand’s biggest economic challenge: its out-of-control housing market.
A housing market is considered affordable when the median home costs three times a median household’s income.
For Auckland, that ratio now stands at 10.2 times. In other words, Auckland has become one of the world’s most expensive cities.
This is a problem for New Zealand, because too many economic resources are poured into housing at the expense of more productive parts of the economy.
In 2012,when he was chief of the Bank of New Zealand, NAB’s Andrew Thorburn even argued that New Zealand suffered ‘‘a massive long-term bias towards investment in residential property – a non- productive asset in investment terms’’.
Over the past weeks, the opposition Labour party had announced that they are prepared to take radical action to cool down the housing market. In short, Labour intends to flood the market with new supply through a range of measures. These include abolishing urban growth boundaries, planning regulations and the use of bonds to finance new local infrastructure.
These comments were later supported by Minister English and the leaders of the ACT and Green parties.
Budget 2016 could have been the perfect opportunity for the government to send a clear signal that it is serious about increasing housing supply by making provisions for it. Instead it delivered only piecemeal measures around social housing.
Despite this disappointment, Budget Day 2016 in New Zealand was a rather boring affair – at least by Australian standards, where budgets seem often to consist of electoral bribes targeting swing voters in marginal seats,and surpluses no longer seem to matter.
But maybe, just maybe, this is a sign that New Zealand is just a little better governed than its trans-Tasman neighbour?