Summary -------
* The Labour/Alliance Government is scheduled to release its first Budget at 2.00pm (NZT) on 15 June.
* As a result of the transparency required by the Fiscal Responsibility Act, which includes the signalling of key policy
initiatives in the March Budget Policy Statement (BPS), New Zealand budgets tend to be fairly low key events.
* Notwithstanding the fact that this is the new Government's first Budget, we expect it to be similarly low key. The
broad economic and fiscal forecasts have already been set out clearly in a trilogy of speeches given by Finance Minister
Cullen over the past month.
* The Treasury is expected to make only modest changes to its forecast growth profile, largely as a result of stronger
than expected activity in late 1999 and weaker activity in early 2000. GDP growth is likely to be forecast to gradually
slow from around 4% over the past year to about 2.5% by 2003.
* The Government is expected to forecast a rise in the operating balance from a surplus of around 0.8% in 1999/2000 to
around 2.1% in 2002/03.
* The Debt Management Office (DMO) is expected to announce a bond tender programme of around $3.5bn for the coming
fiscal year. Proceeds from the sale of the 3 G spectrum will enable the DMO to reduce the stock of T-bills.
Economic Outlook ----------------
* The Treasury's forecasts have been finalised around 17 May, which means that they are unlikely to capture the recent
weakness in the NZD and the pronounced downturn in business confidence.
* Relative to March, the Treasury is likely to have factored in a stronger outlook for world activity and a somewhat
different profile for the domestic economy - weaker in H2/00 and a little stronger further out.
* Finance Minister Cullen's recent comments suggest that the Treasury's growth forecasts will show that the unexpectedly
strong increase in activity in late 1999 is not going to be offset over the forecast period, implying a positive `base
effect' for the fiscal surplus projections.
* We also expect the Treasury to project a less optimistic inflation outlook than included in the latest RBNZ statement.
The Bank showed inflation not exceeding 1.8% over coming years, while the Treasury is likely to project figures above
2%.
Economic Outlook: GDP Growth
ann. Average % change 2000 2001 2002 2003 (March Year) Forecast Projection Projection Projection March BPS 3.6 3.7 2.7
2.1 Budget (DB Expectation) 4.1 3.6 2.9 2.4 DB Forecast 4.3 3.9 3.8 3.3 Source: DB Global Markets Research
Fiscal Policy Outlook ---------------------
* Dr Cullen has stated that he expects to announce a track for the operating balance at least as positive as that
indicated in the March Budget Policy Statement - due to the positive base effect resulting from unexpectedly strong
H2/99.
* In the current fiscal year (ending in June), the operating balance for the 10 months to April showed a surplus of
April of $1,820m. The Treasury has indicated some reduction of the surplus over the remaining months, bringing the
outturn closer to the initial estimate of a $400m surplus. However, that does not include an estimate for valuation
adjustments to the Government Superannuation Fund (GSF) and the unfunded claims liability of the accident compensation
insurance. We estimate those adjustments to be around $400m in total, resulting in an overall budget surplus projection
of around $800m (0.8% of GDP).
* For the coming three years, we expect projections of the Government surpluses rising gradually to 2.1% of GDP,
slightly ahead of the initial projections made in March.
Fiscal Outlook: Operating Balance
$bn 2000 2001 2002 2003 Forecast Projection Projection Projection March BPS 0.4 1.0 1.9 2.2 % of GDP 0.4% 0.9% 1.6% 1.8%
Budget (DB expectation) 0.8 1.1 2.2 2.5 % of GDP 0.8% 1.0% 1.8% 2.1% DB Forecast 0.8 1.0 1.6 2.0 % of GDP 0.8% 0.9% 1.4%
1.6% Source: DB Global Markets Research
Bond Tender Programme ---------------------
* The last tender for the year ended 30 June 2000 is scheduled for 22 June. Given recent trends in cash flows there is
some chance that Government may announce the cancellation of that tender on 15 June.
* Looking ahead, around $3.2bn of 2/01 bonds will mature in 2000/01 ($2.6bn net in market plus $516m held by the
Earthquake Commission).
* Our expectation is that the Government will forecast a cash surplus from operations of around $1bn. Given expected net
cash outflows (including investment spending) of around of $1.3bn, that suggests that the Government may issue around
$3.5bn of bonds in 2000/01 (perhaps split between 4/03s and 11/11s).
* We would also expect to increase the DMO to increase its activity in the swap market in order to reduce funding costs.
* Proceeds from the sale of the 3 G spectrum next month are likely to be used to retired 12 month T-bills.
Policy Initiatives ------------------
* Dr Cullen has said that the Government will use the Budget to consolidate its new policy platform and to begin to
`build bridges' to the business community, following the increasingly negative business reaction to Labour/Alliance
policies over recent weeks (the reversal of the Employment Contracts Act in particular).
* The rhetoric of the Budget will be founded on four pillars, the first of which is maintaining operating surpluses over
the business cycle. As noted above, Dr Cullen has suggested that the operating surpluses in the Budget will at least
match those signalled in the Budget Policy Statement.
* The three remaining pillars are: - encouraging and supporting young people to acquire skills; - industry development;
and - a proposed fund to meet the superannuation entitlements of future generations of retired New Zealanders.
* Many of the initiatives look likely to be announced ahead of the Budget by various Ministers of the Crown.
* The key aspects of the industry development package are likely to be saved for the Budget speech, although it has
already emerged that tax deductibility for R spending is off the agenda. The initially proposed export guarantee scheme seems to have suffered the same fate.
* Little additional detail is expected on Dr Cullen's proposed superannuation scheme. Apparently, work on the issue will
be intensified during the months following the Budget.
Darren Gibbs, Senior Economist, New Zealand, (64) 9 351 1376 Ulf Schoefisch, Chief Economist, New Zealand, (64) 9 351
1375