Finance Minister Bill English was yesterday reluctant to commit his new found fiscal surplus to tax cuts in 2017.
The cuts were floated during the last election campaign by Prime Minister John Key who envisaged setting aside $500 million per Budget for tax reduction or the further repayment of debt.
That sum would be in addition to the $1 billion each Budget for further spending, including $600 million to $700 million for health and education.
This was predicated on the building of larger surpluses after a return to surplus over the 2014 – 2015 fiscal year.
But that was then and yesterday was the release of the final Government accounts for the 2014 – 2015 fiscal year.
They showed a $414 million surplus.
How it was all going to turn out had been really anybody’s guess so yesterday’s surplus was something of a surprise.
The confusion started just over a year ago in August 2014 with a Treasury forecast for the 2014-15 outcome in its Pre-Election Fiscal Update of a $300 million surplus; nine months later in May in the Budget that was flipped over into a $700 million deficit and yesterday that had flipped back to a $414 million surplus – more than had been forecast prior to the election.
That of course raises the question of where it leaves the Budget forecast of a $1.5 billion surplus in 2017 on which the tax cuts promises are based.
Mr English’s answer to that is that Treasury needs to start again.
“We’ve got redo all the forecasts because a hell of a lot has happened since the last forecasts which were actually in April,” he told POLITIK.
“We’ve been through a soft winter and things don’t look as cheerful as they did then.
“So that’s all got to be recalibrated so that’s why we are not jumping into any conclusions about tax cuts other than to say that the billion and half we’ve got sitting there in 2017; that just stays there.
“We’re not looking at changing that.
“We’ve got to go through all the processes.”
Almost everything depends on tax revenue forecasts.
And Mr English is expecting revenue to be down on the current forecast for the next three years.
“Who knows? Treasury look grim on a sunny day.
“I’ll get some forecasts in the next couple of weeks which they’ll start kicking around.”
One problem which is worrying Mr English is the likelihood that inflation will stay low and that that will impact on the actual amount of cash flowing into Inland Revenue.
On Monday Reserve Bank Governor Graeme Wheeler said the bank’s surveys showed inflation expectations had fallen and were now consistent with inflation settling at 2 percent in the medium term.
That suggests that though Mr English could celebrate his surplus yesterday, the overall economic outlook and low inflation might cramp the Government’s revenue and thus reduce its possible future budgets surpluses.
There is also another factor which might limit any tax cuts.
Mr English has imposed rigid spending disciplines right across the Government sector and in some areas those are now beginning to tell raising the question of whether Government spending will have to rise.
In some areas four years of frozen budgets are now starting to impact.
Labour MP Stuart Nash yesterday raised the situation of the Overseas Investment Office which he said had not had a funding increase for four years.
“In the 2011/2012 financial year the OIO received less than $3m – exactly the same as the 2014/2015 financial year,” he said.
“The Lochinver decision took over 12 months and the average time to process consents has jumped 30 per cent from 43 days in 2012 to 56 days in 2014.”
Mr Nash’s complaints came on the same day that Economic Development Minister Steven Joyce launched another of his glossy strategy papers – this one headed “New Zealand welcomes investment” which said we needed to attract more international investors into opportunities that grew new industries, put more capital into existing industries, and attracted investment and job growth in regions around New Zealand.”
Mr English all but conceded Mr Nash had a point.
“There are examples where you just run out of rope but the threshold for that is pretty high,” he said.
“The OIO may well meet it for obvious reasons.
“Logically there is going to be more of those kind of cases come up.”
And he also said that the Government needed to be investing in services.
Add to that his uncertainty about how El Niño might impact this summer.
He will today make a speech about the economy overall based on his impression from the IMF conference he has just attended in Peru Which may set some sort of a frame through which to look ahead.
But he believes these are difficult times for economic forecasters.
He said first we had oversupply in the dairy industry, then it came back and now we could even face reduced supply because of El Nino – all of which impacted on the terms of trade and therefore Government’s revenues.
“You can’t blame Treasury for getting some of that stuff wrong.”
It is that concern about the volatility of the economic outlook which makes forecasting when – if at all – that tax cuts come all but impossible.