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19 Dec 2016

The Half Year Economic Update

The New Zealand government has released its Half Yearly Economic and Fiscal Update (HYEFU), including an improved set of budget surplus forecasts and plans to increase the capital spending allowance. Unveiled by Bill English on the eve of becoming New Zealand's latest Prime Minister, the former Finance Minister painted a positive picture of the country's economic situation amidst a wider scene of global turmoil and uncertainty.

Treasury forecast an Operating Balance Excluding Gains and Losses (OBEGAL) surplus of NZ$473 million for the current 2016/17 year, down from the May 2016 forecast of NZ$700 million. Despite a smaller than expected surplus due to the NZ$1 billion Kaikoura earthquake rebuild, Treasury still see the OBEGAL surplus building to NZ$8.5 billion by 2020/21. The Government's borrowing programme has also been increased, with debt repayment and quake rebuild taking priority over tax cuts.

Forecasts for economic growth and migration have also been increased, with nominal GDP expected to reach NZ$23.7 billion over the next four years and expected tax revenues expected to reach NZ$6.6 billion. English increased the Government's capital allowance from NZ$900 million to NZ$3 bln in 2016/17, growing to NZ$2 billion a year in the three years leading up to 2021. With New Zealand’s economic expansion and above-trend growth expected to continue, capital allowance for infrastructure spending is set to grow to NZ$5.4 billion over the next four years.

In other details from the HYEFU, the operating allowance for the Government has been kept at NZ$1.5 billion and the New Zealand Debt Management Office (NZDMO) increased its gross bond issuance plans for 2016/17 by NZ$1 billion to NZ$8 billion. Much of the growth forecasts are linked to rising migration numbers, with Treasury increasing its net migration forecast from 12,000 to 20,000 a year by 2020/21. The overall increase in net migration from the May Budget was 65,000 over the next four years, numbers which are necessary to keep growth forecasts in line. 

Reserve Bank Governor Graeme Wheeler has similar positive expectations regarding economic growth, with above-trend growth, strong employment, and rising inflationary pressures looking promising despite the risk of a housing market correction. "The main domestic risk (and one that could be triggered by developments offshore) is a significant correction in the housing market." said Wheeler, adding "At this stage, however, the greatest threat to the expansion lies in possible international political and economic developments and their implications for the global trading environment."

According to Wheeler, the current economic climate means that last month's interest rate cut may be the last for the foreseeable future: “At this stage, global and domestic developments do not cause us to change our view on the direction of monetary policy as outlined in the November MPS [Monetary Policy Statement]. We expect monetary policy to continue to be accommodative, and that the projected policy settings will help generate sufficient growth to have inflation settle near the middle of the target range.”

Image Source:  Michael Leslie /