Finance Minister in a major speech yesterday is suggesting that the Government may review its fiscal targets and may end up slowing down the rate at which it repays debt.
Currently the targets are:
- Returning to surplus this year and maintaining surpluses in the future
- Reducing net government debt to 20 per cent of GDP by 2020, including repaying debt in dollar terms in 2017/18
- Further reducing Accident Compensation Corporation (ACC) levies on households and businesses
- Beginning to reduce income taxes from 2017 with a focus on low and middle-income earners, and
- Using any further fiscal headroom – including from positive revenue surprises – to get debt down to 20 per cent of GDP sooner than 2020.
Plainly he is concerned that Government revenue is not going to be as buoyant as he might have hoped.
And that that could tie his hands on spending and also the promised 2017 tax cuts.
All year he has been suggesting that inflation was the Finance Minister’s friend because it allowed for an increase in nominal incomes and thus taxes.
But in a low inflation environment that increase doesn’t happen.
Mr English has just returned from the annual meeting of the International Monetary Fund where he said a key topic for discussion was inflation – “and in particular the lack of it.”
“This is a global phenomenon, not just something affecting New Zealand,” he said.
“As the Reserve Bank Governor said yesterday, in the vast majority of the 30 or so economies where central banks pursue inflation targeting, headline and underlying inflation have averaged below specified goals over the past few years.
“Low global inflation is expected to persist for some years to come.
“For governments, this means revenue won’t grow as fast as previously thought.”
That means he has a choice — he can continue with the fiscal targets of reducing debt to 20% by 2020 – or even earlier but that would mean even more savage spending cuts than he has already had to implement.
Or he could relax that target and give himself some room for modest spending increases in cases where, as he explained to POLITIK ON Wednesday, he has run out of rope.
So he said yesterday that it was s timely to take stock of whether the suite of fiscal targets continued to be appropriate.
“The surplus target has been highly effective when the books needed a sharp improvement from an $18.4 billion deficit,” he said.
“It has certainly motivated me as Finance Minister, as well as the wider Cabinet – it was the driver of two net-zero budgets.
“But now the books are back in balance, we need to consider whether a point target in a particular year is still the best option.”
That sounds suspiciously like a heavy hint that he is preparing to relax on the debt target.
In Parliament during Question Time, he committed to continuing to run surpluses.
“We now need to generate ongoing surpluses in order to reduce debt levels,” he said.
He said in his speech that any new fiscal targets would be consistent with ensuring net debt was reduced over time.
“Previously Governments have been able to passively get on top of debt from tax revenue windfalls helped by strong inflation.
“That option isn’t open to us.
“Economic conditions mean that Crown revenue for the next few years is likely to be lower than Treasury were previously forecasting.”
Interestingly he didn’t mention the proposed 2017 tax cuts in the speech.
But in Parliament he said the Government had allowed for the opportunity for moderate tax reductions, and we remain fixed to that policy.
But ACT leader David Seymour was pressuring him to not only cut in 2017 but also to start some cuts now.
““It’s hard to get excited about possible future tax cuts when any benefit would be offset by ongoing stealth hikes,” said Mr Seymour.
“If the government wants to cut taxes honestly, it needs to permanently tie tax brackets to inflation.
“Bracket creep has cost the average household $1036 since 2010, far more for higher-income families, and the bill keeps rising.”
Mr English said the revised fiscal targets would be released on December 15 as part of the end of year fiscal update.