​Each year Bill English promises us a workmanlike budget and each year he delivers on that promise.

Budget 2016 maintains English’s commitment to debt reduction, presages the renewal of contributions to the New Zealand Superannuation Fund and advances the social investment approach to services with its focus on making a little spending go a long way.

The fiscal context

A strong Crown balance sheet provides resilience to the economy, which is important in our earthquake prone, trade-reliant country and particularly so when – as now – the global outlook is fraught with uncertainty.

The fiscal picture painted in the budget has New Zealand shrugging off the last effects of the GFC with:

  • sharply increasing surpluses over the forecast horizon, reaching $2.5 billion in 2017/18 and $6.7 billion by 2019/20, and
  • net debt peaking next year at 25.6 of GDP before reducing in line with the government’s objective of bringing it below 20% by 2020.

The government has also committed to renewing contributions to the New Zealand Superannuation Fund in 2020/21 – ending an eight year hiatus.

How safe these forecasts are from the Prime Minister’s interest in delivering tax cuts remains to be seen and will no doubt be influenced by the state of National’s political fortunes.

Budget overview

Budget 2016 is a modest affair with two thirds of the $600 million brought forward from next year’s budget dedicated to debt repayment.

The key to the new spending is to direct it to where it will make “a real difference”.

The additional $2.2 billion to health over the next four years will relieve some of the intense budget pressures facing the sector and is the largest single budget allocation. But the budget “brand” items are:

  • $761 million for “innovation” ($411 million to science, $257 million to tertiary education and apprenticeship programmes, $94 million for regional development)
  • $2.1 billion for infrastructure (already announced projects in transport, plus 480 new classrooms to accommodate increased pupil numbers and the IRD’s new tax administration system)

Social investment

The $652 million boost is modest even within the scope of this modest budget. It compares to the $837 million increase for Justice and Corrections and to the $790 million price tag for the benefit increases in Budget 2015.

But the package is tightly targeted to the most vulnerable, consistent with the ethos of the social investment model which takes a data-based approach and draws on actuarial methods to inform decision-making.

Components include:

  • $200 million for a system-wide reform of services to vulnerable children
  • $61.2 million to extend the Youth Service to 18 and 19 year olds
  • $50.3 million to reduce barriers to employment for people with complex health conditions
  • $43 million for schools to assist children at risk of non-achievement
  • $40 million to improve data sharing and security, and
  • $36 million for healthier, warmer homes.

ETS

The abolition of the two for one subsidy has been confirmed. It is to be phased out in three equal instalments over three years, beginning on 1 January 2017, and will net the government an expected $356 million over the next four years, based on a unit price of $12.

The $25 cap will remain.

Housing

Not a lot new was expected on this front in the budget, and not a lot has been delivered. The focus remains on the supply side, with another $100 million in capital funding toward building affordable housing on surplus Crown land in Auckland.

The long-anticipated National Policy Statement on Urban Development will be released for consultation soon. It will require councils (read Auckland Council) to assess their decisions in relation to the likely impact on housing availability. It is understood that this might include a requirement to increase land supply until house prices adjust – presumably relative to incomes.

Tourism

The budget provides $45 million to assist the tourism industry to cope with increasing demand. This includes $12 million to help communities with small scale projects, such as new restrooms and carparks, and $8 million to Tourism New Zealand for marketing.

Tobacco excise

This budget slaps an extra 10% on tobacco each year for the next four years, beginning on 1 January.

Income tax

Next year’s budget may dangle the prospect of tax cuts. English indicated in the budget lock-up press conference a sensitivity to the impact of fiscal drag. It is estimated this will add around $1.1 billion to PAYE over the four-year forecast horizon.