Government has to deliver on Budget magic

03:33, May 15 2014

Business leaders have praised the conservative Budget 2014 for its much-promised return to surplus, but warn it relies heavily on the magic of economic growth.

This year's Budget - which confirmed a small surplus of $372 million next year with growing surpluses to come - would have no immediate effect on New Zealand's credit ratings and outlook, Standard and Poor's said.

Standard and Poor's said it expected the Government to remain committed to near-term operating surpluses and, in the medium term, reducing debt as a share of GDP.

The Budget also saw a slight loosening of the purse strings, with family-focused spending at the forefront in an election year.

"The magic in Budget 2014 is the forecast growth of the economy," said PwC corporate tax leader Geof Nightingale.

"The trick is making sure the magic is real."


Nightingale said sensible fiscal management should help bring that to fruition.

Businesses would welcome extra funding for science and innovation, and further reductions in ACC levies of $480m in 2016, he said.

He also praised moves to allow tax deductions for previously non-deductible "blackhole" research and development spending.

Overall, new operating spending will rise from $1 billion this year to $1.5b in 2015, then an extra 2 per cent each year after.

Westpac economists said it was surprising to see a notable increase in the spending allowance with relatively few initiatives to improve revenue.

Instead, the spending would be funded by sacrificing larger surpluses in later years.

"The additional spending will provide a slight boost to GDP growth, and increases the pressure for higher interest rates, though only marginally so," Westpac said.

Much of the extra money is aimed at social causes, including an extension to the paid parental leave scheme, free GP visits for under-13s and more early childhood funding.

Deloitte chief executive Thomas Pippos approved of the targeted spending, saying it would help boost productivity and workforce participation.

Pippos said even the most uncharitable should see the Budget as a success, in that it was "not about the anticipated surplus, but about the journey".

He compared it to Australia, which is looking at record deficits, tax increases, and expenditure cuts to help rein in a A$50b ($54b) deficit announced on Tuesday.

"Budget 2014 may not win the Government the re-election, but it certainly won't lose it for them either," said Pippos.

EY tax partner Aaron Quintal suggested the Government had delivered a "pop song Budget for a rock star economy".

"This budget didn't disappoint because we got exactly what we expected; more of the same," he said.

"This is not a budget that will change anyone's opinion of the Government, be they friend or foe."

Quintal said the "wafer thin" surplus forecast was not really a goal in its own right.

"It is a tool to achieve the Government's key long term goal of getting net Crown debt back down to under 20 per cent of GDP."

He said the Government would be intently focused on rebuilding that buffer, which had helped insulate New Zealand during the financial crisis.

"If the economy does better than is expected over the next few years, that extra money will go back to repaying lenders well before there is any sniff of tax cuts."