Budget has some positive news for NZ's bond market
Anthony Davies explains the Government's 1999/2000 budget.
Sunday, May 23rd 1999, 12:00AM
Finance Minister Bill Birch delivered his fourth and final budget on Thursday. It showed the Government's spending initiatives in the 1999/2000 year are both few in number and small, and focus on the likes of families, healthcare and policing.
The Budget contains no major surprises nor any overt election year "bribes" of any significance. In short, nothing to frighten the investment markets.
It is a very much a continuation of National’s "steady as she goes" economic management, attempting to steer a middle course between fiscal prudence and demands for greater spending. Election year or no election year, the Government is sticking to its guns of reducing net debt, lowering taxes and keeping extra handouts to a minimum.
However the Budget’s tax announcements are one of the few surprises. There is nothing concrete on future income tax cuts – despite the fact that tax is shaping up to be a major election issue. Rather the Government reminds us of the tax cuts it has made since 1996 and expresses confidence it will be able to deliver to further personal tax cuts within the next term of Parliament, assuming continuing sound fiscal management, economic growth, steady reduction in debt etc.
This year’s tax package is four-fold: tax breaks for low and middle income families through a new Parental Tax Credit system, abolition of the Public Broadcasting Fee from July 1, 2000, abolition of Stamp Duties, and the abolition of Estate Duties (while Estate Duty has not been payable since 1992, it was not abolished, simply zero-rated).
Savings & Investment policy cupboard bare
Unfortunately there is nothing in the Budget specifically addressing how to promote private savings or provision for retirement - only platitudes and vague intentions. The issue gets a brief mention in Bill Birch’s Budget speech.
He makes three points:
- The response to public floats of state assets is helping New Zealanders diversify their savings;
- The Superannuation 2000 Taskforce (set up late last year after the Superannuation Accord disintegrated) "will, amongst other things, examine the impact of superannuation on incentives to save"; and,
- The Government will "continue to work to improve tax neutrality for savers across savings products".
Fiscal & Economic Summary
The Budget papers forecast an operating surplus for the 1998/9 year of around $800 million - rising to $2.2 billion, if one includes the Contact Energy sale proceeds. This is the Government’s sixth consecutive surplus. It expects to almost breakeven for 1999/2000 with a modest $36 million deficit forecast. However, further out the forecasts are for a $790 million surplus in 2000/1 and a $1,504 million surplus in 2001/2. Next year’s deficit forecast is attributed to revenue falling back a little before picking up again the following year while spending continues to grow. However, overall the revenue/expenditure trend is positive with expenditure growth forecast to average 2.9 per cent a year over the next three years while revenue should average 5.1 per cent.
These forecasts of surpluses assume the New Zealand economy continues growing after coming out of recession in the 1998 September quarter. GDP growth is forecast at 2.9 per cent, 3.5 per cent and 3.0 per cent respectively over the next three years. Holding back stronger growth will be the relatively weak global economy (global economic growth is forecast to average only around 2 per cent over the same three years), high levels of household debt, weaker net migration and less catch-up and replacement spending (that is, people not buying those items they had been putting off buying until they had a bit more cash to spare).
The Government plans to use its surpluses to continue retiring debt. Net public debt currently stands at 22.5 per cent of GDP. In three years time it forecasts that figure will have been cut to 20.2 per cent.
In the shorter term, this year’s surplus gives it latitude to reduce its debt issuance programme. It has cancelled the $400 million bond tender scheduled for 10 June, reducing the 1998/99 bond programme to $3.6 billion. Next year it plans only a $2.85 billion domestic bond programme spread over 10 tenders. In addition it is suspending issuing inflation bonds and will review the situation this time next year.
The inflation bonds decision was expected. Inflation is forecast to rise – from the present 1.0 per cent to 2.0 per cent within three years according to the Budget papers. With inflation bonds currently offering a real yield of 4.9 per cent, continuing to issue them in an inflationary environment will mean unnecessarily high debt-servicing costs for the Government when its focus is on reducing these costs. As part of that strategy Birch signaled Treasury’s Debt Management Office (DMO) intends to become an active participant in the interest rate swap markets to more efficiently manage its debt servicing. In other words, just as New Zealanders shop around to get a better deal on their mortgages, so the Government intends to shop around in the markets to get the best deal on its financing. This should have a positive impact on our domestic bond markets. The entry of a player the size of the DMO will add more liquidity. To date, a number of commentators have highlighted limited liquidity as a significant weakness of New Zealand’s investment markets.
Anthony Davies is a communications manager with Colonial First State Investments.
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