Finance Minister Bill English delivered this year’s Budget yesterday and, while health and education were the big winners in terms of spending, there were few significant new initiatives.
For example, despite intense public focus on Auckland’s housing issues in the lead-up to the Budget, English delivered little in the way of housing spending.
However, ASB chief economist Nick Tuffley said the Budget showed the government’s books are in good shape, although the big winner is caution.
An improved economic outlook has given a leg up to the government’s books, but the over-riding focus has been paying down debt quicker, he said.
“As a result of the stronger accounts, there was an opportunity to loosen fiscal settings to generate some growth and (in particular) some much-needed inflation to help out the Reserve Bank.”
That opportunity wasn’t taken, but the option remains wide open for next year’s Budget, Tuffley said.
“With little additional spending indicated, and the fiscal stance still contractionary, we still expect the Reserve Bank will cut the OCR to 1.75% to more comfortably achieve its inflation objective.”
ANZ chief economist Cameron Bagrie saw the Budget as a “strengthen the war-chest” type of Budget.
He said the fiscal projections make for favourable reading, with a solid economic growth background and market friendly fiscal numbers.
“From a spending point of view, ‘prudence’ rings loud and clear - repaying debt is a strong priority. We’re not convinced debt needs to be such a dominant priority at present.
“On average, the fiscal stance is slightly more restrictive than previously signalled. At that margin, that is consistent with monetary policy and interest rates being lower for longer, although we suspect the Reserve Bank will look at this Budget as unlikely to change their views.”
Deutsche Bank economists said there has been only a modest market reaction to the Budget.
They also believe the Budget will have very little impact on the Reserve Bank’s figuring as it prepares the projections that will feature in the upcoming Monetary Policy Statement (MPS).
“If pressed, at the margin the Budget is mildly helpful to the Reserve Bank in that the extension of the tobacco tax will raise headline inflation and the near-term fiscal outlook is more expansionary than previous published projections had suggested.”
It is worth noting that the Budget forecasts inflation to stay lower than expected for longer, rising to 2% in 2017.
At the same time, none of the housing related measures in the Budget will have a short-term impact on house price inflation in markets around the country, particularly in Auckland.
This means the two duelling factors of low inflation versus a booming housing market, which have been weighing on Reserve Bank considerations, are still at play.
In turn, this suggests the Reserve Bank’s next OCR move is likely to remain a guessing game for the time being.
