Regional infrastructure, tourism, forestry, fishing and aquaculture, house construction, tertiary education, and vocational training are the industry sectors set to benefit the most from the Labour-New Zealand First coalition government’s 2018 Budget released today, according to industry information research group IBISWorld.
According to IBISWorld senior industry analyst Andrew Ledovskikh, the Budget seems to have achieved the aim of juggling delivering electoral promises with continued commitments towards fiscal responsibility. However, the sustainability of spending over the next five years is still subject to some optimistic economic forecasts.
“Labour ran on a number of spending commitments during the election campaign, including a focus on health and education funding. Ultimately, this budget looks like it has managed to walk the fine line between spending and fiscal responsibility that the Labour-New Zealand First coalition government promised. However, whether the budget surplus continues to grow, and government debt continues to fall over the next five years, as the government portends, is still subject to some rosy economic forecasting,” said Mr Ledovskikh.
Provincial growth fund
One key area of investment in the 2018 Budget is the Provincial Growth Fund (PGF), which will provide significant investment in regional infrastructure.
The PGF aims to boost economic development in areas of the country that have suffered from underinvestment and poverty. While funding is available for all NZ regions, key areas for investment are Northland, Bay of Plenty, East Coast, Hawke’s Bay, Manawatu-Whanganui and West Coast. In addition to investing in regional projects and infrastructure projects, sector investments are included in the $1 billion per year fund.
“The PGF will boost regional development in high-value sectors of the economy, including the Tourism industry and the Fishing and Aquaculture industry, which are expected to total $38.8b and $1.5b NZ-wide in 2018-19, respectively,” said Mr Ledovskikh.
“The PGF will also support the One Billion Trees Programme, which plans to doubles New Zealand’s planting rate to one billion trees over 10 years. This will benefit the Forestry and Logging industry, which is expected to grow strongly over the next five years, to $8.9b in 2023-24.”
KiwiBuild and home construction
The Labour-New Zealand First coalition government has also pledged to invest $2b in housing through its KiwiBuild programme.
“Within the programme, the Government plans to build 100,000 high-quality, affordable homes over 10 years, 50% of which will be in Auckland. The government initially stated that houses in Auckland will cost a maximum of $600,000. However, in early May it was revealed the price of these houses had risen to $650,000, faster than average house price increases,” said Mr Ledovskikh.
The government will also create an authority to fast-track development in cities, to get new homes built faster, and remove the barriers that are stopping Auckland expanding.
The KiwiBuild programme is expected to support the $12.8b House Construction industry, and provide a boost to employment figures from its expected total of over 25,000 in 2018-19.
The government has also pledged to invest strongly in health, with $3.2b of operating funding over the next five years and $850 million of capital funding. Most of this funding is being funnelled to District Health Boards for additional support for hospitals and primary care providers. Funding will provide support to the $19.6b Hospitals industry. There is also additional funding for air ambulances and disability support services.
Tertiary education and vocational training
Major investments are also expected to be made in education.
“Investments have already been made to make the first year of post-secondary education or training fees free, and to increase student allowances and living-cost loans by $50 per week. The government is projected to invest over $2.5b in its tertiary education package over the next five years, which will support the $1.1b Technical and Vocational Education and Training industry over the period,” said Mr Ledovskikh.
In addition, the government has announced a funding boost of $21.5 million over four years to support preschoolers with learning and behavioural problems.
Rosy economic forecasts underpin debt and surplus commitments
While the budget surplus is expected to dip to 1.1 per cent of GDP in 2018, down from 1.5 per cent of GDP in 2017, the government has forecast it will recover over the four years through 2022, peaking at 2.1 per cent of GDP. This would be the largest budget surplus as a share of GDP since the global financial crisis. As a result, government debt is projected to fall to almost 19 per cent of GDP by 2022.
These estimates are based on a forecast decline of government expenditure, to 28 per cent of GDP by 2022, down from a projected 28.5 per cent in 2019.
“This would require the government to restrain new spending to a total of 13.1 per cent growth between 2019 and 2022, or no more than $11.4b in new spending. This is plausible but will be made more difficult by the Labour-New Zealand First coalition promises to boost spending in health and education,” said Mr Ledovskikh.
“In terms of spending, the government is relying on the conclusion of the KiwiBuild programme in 2021 and the reversal of the 2017 Budget tax cuts, which is expected to save the government almost $2b a year. However, staged increases in the families and tertiary education spending packages will put pressure on this target. The government not only expects to restrain spending to 10.0% growth from 2019 to 2022, but also expects to oversee an 18.8 per cent increase in Crown revenue, despite the decision to reverse the Budget 2017 tax cuts,” said Mr Ledovskikh.
“While this is certainly plausible, the main concern will be the relatively rosy outlook in terms of wages and unemployment over the next five years.”
“Wage growth, at 1.6 per cent, lagged CPI in 2017. However, wage growth is expected to jump to 3.2 per cent in 2018, no doubt assisted by the rise in the minimum wage. This growth is then anticipated to continue at approximately 3 per cent over the four years through 2022. Meanwhile, CPI is forecast to drop to 1.5 per cent next year before recovering to 2 per cent over the same period. In addition, unemployment is forecast to continue dropping, reaching 4.2 per cent in 2022,” said Mr Ledovskikh.
“While this certainly would be a great outcome for New Zealand workers, it is an optimistic scenario, in a post-GFC world where Western countries have struggled to find strong wage growth. Getting unemployment down to 4 per cent, pre-GFC levels, may well see a rise in wages, but it would be very fortunate to avoid a stronger rise in inflation in that scenario.”