The Labour-led coalition government will run a tight fiscal policy, keeping a lid on economic growth over the next five years, the Treasury’s half year fiscal and economic update says.

However, Finance Minister Grant Robertson is indicating the government could decide to spend more as it runs large Budget surpluses and reduces government debt.

After reporting a the bigger than expected $5.5 billion operating surplus before gains and losses at the end of the June 2018 year, the Treasury has trimmed its surplus forecasts for the next three years as spending rises at a faster pace than the tax take and spending deferred from last year occurs this year. The half-year economic and fiscal update predicts an obegal (operating balance excluding gains and losses) surplus of $1.7 billion in 2019, rising to $7.6 billion by the end of the forecast horizon in 2023. 

Core Crown spending will rise about 10 percent to $88.7 billion in the year ending June 30, 2019, or 29.5 percent of GDP, which includes about $1 billion of expenditure that had been expected in the year earlier. By the end of the forecast horizon, core spending will be about $103.2 billion, or 28.3 percent of GDP.

While later than expected operating spending is expected to provide a fiscal impulse to the economy 2.2 percent of GDP in the current fiscal year, the forecasts show a cumulative 2.5 percent contractionary impact on the economy as capital spending slows and the government’s tax take as a ratio of the economy increases. 

The forecasts include the existing $2.4 billion operating allowance. Robertson said the government will keep the operating allowances unchanged until, and that it would be irresponsible to increase them now given the uncertainty in the global economy. 

However, he said the fiscal impulse forecasts only captured what the government has currently decided. 

“Those change if we make different decisions,” he said. And he would take into account the impact of the Reserve Bank’s monetary policy on the economy. 

The government anticipates a bigger tax take than previously expected, with a tightening labour force seen as driving up the personal income tax take by around 5-to-6 percent in each of the next five years. Of that, 1 percentage point will come from fiscal drag – where rising wages shift people into higher tax brackets. Benign economic growth is expected to support household consumption and corporate profits, which in turn are seen boosting GST and the company tax take. 

Core tax revenue of $80.2 billion in 2018 is forecast to rise to $84.3 billion in 2019, and up to $105.3 billion by 2023. As a proportion of the economy, the tax take was 27.9 percent of GDP in 2018, and is forecast to be 28.9 percent of GDP by 2023.

Some $41.6 billion of forecast capital spending over the five-year horizon is expected to exceed the government’s cash inflows, meaning it expects to run cash deficits for the next three financial years. 

Despite that, the forecasts are for lower net debt than in the May budget. Net debt of $57.5 billion, or 20 percent of GDP, will increase to $62.7 billion, or 20.9 percent of GDP, in 2019, before unwinding to $63.5 billion, or 17.4 percent, in 2023. 

The government’s budget responsibility rules commit to reducing net debt to 20 percent of GDP within five years, which would occur in 2022 on these forecasts. 

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