7.00am – In the political economy this week, the focus is on the Budget on Thursday and the Reserve Bank’s half-yearly Financial Stability Report on Wednesday.

Both will set the scene for the year ahead of the election in politics, the economy and the financial system.

Politically clever, but still dumb – The Government’s move last week to a 15-25 percent net debt target range from the current 20 percent by 2021/22 gives it some politically clever flexibility to borrow up to an extra $15 billion at current GDP levels.

But, in my view, it remains woefully inadequate to really address the $150 billion plus of physical and social infrastructure investment needed over the next decade to jump-start New Zealand’s stalled productivity growth, reduce child poverty and achieve carbon neutrality.

Ratings agencies signaled to Thomas Coughlan last July when borrowing costs were almost three percent that New Zealand could easily borrow another $30 billion without any change. The Government 10 year bond yield fell to record lows of 1.73 percent by the close on trading on Friday.

Lipstick on a holding pattern – Instead, the Government has signaled a fiscally cautious budget that sticks within the current Budget Responsibility Rules, but talks a good game about being a Wellbeing Budget.

It may signal how money could be reallocated within the current limits to maximise wellbeing, but the first reshuffles will be small and substantial improvements in wellbeing require massive infrastructure investment to cope with population growth of half a million over the last five years, on top of dealing with an existing housing affordability crisis and stagnant skill levels.

Finance Minister Grant Robertson told me on Friday the Labour Party was meanwhile working on its own Budget Responsbility Rules policy for the next election. The Greens are doing the same. The 15-25 percent range may also be a holding pattern policy.

The wrong way around – Usually, the idea with infrastructure to ‘build it and they will come.’ Essentially, New Zealand invited people to come, but hadn’t built the infrastructure. That’s because migration settings are controlled by the Beehive, which benefits from population growth through higher GST and income taxes.

But the spending on housing and transport infrastructure is still largely controlled by local Governments and the conservative home owners in leafy suburbs who didn’t vote for the migration and don’t want to pay higher rates to service the debt needed to build suburbs those home owners will never use. The political impasse around infrastructure funding for high population growth has been brilliant for property values and the Government’s bottom line, but awful for housing affordability, low productivity and all the social ills that flow from those.

‘Don’t move, or the economy gets it’  – Meanwhile, the increasingly intense debate between the Reserve Bank and the big four banks over a proposed doubling of capital levels is threatening to break out of the usually dull nether regions of financial policy consultation.

The Bankers Association warned last week its research showed the higher capital levels would cost consumers and businesses an extra $1.8 billion a year to ensure bank shareholders still get the same return on a higher amount of capital reserves. On Friday, Westpac estimated the change would add 100 basis points or $6,000 a year to the average cost of servicing an Auckland mortgage. It also estimated a reduction in GDP growth of 1.3 percentage points of GDP.

The Reserve Bank has estimated the capital changes would only add 20 to 30 basis points to costs and would ‘wash out’ in the usual volatility of interest rates. On Wednesday we’ll get a better sense of how the Reserve Bank is thinking ahead of its final decision in November, and how hard it will push back at the banks. Grant Robertson wouldn’t comment on Friday at the prospect of the banks holding the economy hostage with a lending strike, or focusing the higher costs on the productive parts of the economy in farming and business.

Overseas over the weekend, British Prime Minister Theresa May announced she would resign on June 7, setting up a Conservative Party leadership vote for late July. Four of the leadership hopefuls, including favourite Boris Johnson, want a hard Brexit on October 31. However, moderate Tories and Labour would still block a no-deal Brexit in Parliament, meaning the political impasse remains unbroken, as Reuters reported.

Meanwhile, far right parties are winning European Union Parliament election results as they come through this morning, Reuters reports.

Long overdue support – Young people leaving state care have essentially fallen off the edge of a cliff, with no transition assistance or support from the state after they turn 18. Laura Walters writes about Tracey Martin’s pre-Budget announcement that sets to change that, with $153.7m going towards a new transition service to help those leaving state care, up until the age of 25.

Oranga Tamariki has been under the spotlight recently, with horrific statistics relating to the uplift of Māori babies, and general criticism about the quality of care.

New legislation coming into force on July 1 aims to improve the service, and reduce the number of children in state care, through a raft of changes, including intensive intervention, ongoing support, and mandatory reporting on Māori outcomes.
Read Laura’s full story here.

Tip-toeing between the elephants – in this week’s Two cents Worth podcast we ask you to imagine you’re the New Zealand Prime Minister. It’s 2025 and you’ve got two calls on the line: one is from Chinese President for life Xi Jinping and the other is from US President for life Donald Trump … and they both want you to join their side in what has become a new cold war. What would you do?

You can read more – and listen to the full podcast – here.

Coming up this week– The two-day Minerals Forum kicks off in Dunedin.

Arvida, Bils Technologies, Eroad and Mainfreight release earnings at 8.30am.

CDL Investments holds its AGM from 10am followed by the Millennium & Copthorne AGM from 2pm.
The Commerce Commission draft decision on the default price-quality path for power companies is due Wednesday.
Asset Plus and Turners Automotive release earnings at 8.30am

The Reserve Bank releases its financial stability review at 9am.

Pacific Edge releases its earnings at 10am

ANZ releases its business outlook at 1pm.

The Vista Group Holds its AGM from 3pm.
The Education and Workforce Select Committee holds public hearings of two petitions; firstly a petition to fund learning support and remove chronological age criteria children with identified developmental delays at 9.15am; and a petition to build a new secondary school northwest of the Wairoa River in the Western Bay of Plenty at 9.50am.
The Finance and Expenditure Select Committee looks at the New Zealand Infrastructure Commission Bill at 11.10am followed by a public hearing of the May Reserve Bank of New Zealand Financial Stability Report at 1.10pm.
The Governance and Administration Select Committee holds a public hearing of an Auditor-General report on managing stormwater systems to reduce the risk of flooding at 9.20am; followed by another report from the Auditor-General into a the procurement of work by Westland District Council at Franz Josef at 10am. The committee also looks into a petition calling for Waiheke Island to be exempt from the APTR at 11am.
The Health Select Committee continues its public hearings of a petition to fund Kadcyla and Palbociclib for breast cancer sufferers at 9am, followed by a petition to fund ketogenic dieticians at Waikato DHB for people with uncontrolled epilepsy at 9.30am.

The Regulations Review Select Committee holds a public hearing of a complaint about the Lawyers and Conveyancers Act at 5.15pm.
IkeGPS releases its earnings at 8.30am.

Stats NZ releases its April building consents figures at 10.45am.
The Government releases the Budget at 2pm.
The Economic Development, Science and Innovation Select Committee holds a public briefing on blockchain at 9.40am, followed by a petition to extend Schedule 4 of the Crown Minerals Act 1991 to include the entire Coromandel Ecological District and to and to ban further blasting, underground and open cast mining within residential zones in the Coromandel/Hauraki region at 10.30am.
The Justice Select Committee holds a public hearing of a petition to make it unlawful for police officers to provide information to crown prosecutors as to whether potential jurors have criminal convictions at 11.40am followed by a public inquiry into elections at 11am.
The Primary Production Select Committee holds a public briefing about vocational training in agriculture at 10.30am.
Wellington Drive holds its AGM from 3pm.
The Overseas Investment Office summaries are expected on Friday.
Finance Minister Grant Robertson delivers a post-Budget speech at 8am.
Moa releases its earnings at 8.30am

ANZ releases its consumer confidence index at 10am.
Victoria University of Wellington hosts a Women in Business pink ribbon breakfast at Karake Café at 8am.
Next week

June 10 – Platinum Partner Gibson Sheat Lawyers hosts a post-Budget Breakfast with Finance Minister Grant Robertson.

Pick of the news links:

Tom Pullar-Strecker (Stuff): Budget 2019: Goodbye ‘NZ Inc’ and welcome to the world of wellbeing

Liam Dann (Herald): Why this is the warm Milo and pyjama Budget (paywalled)

Fran O’Sullivan (Herald): Dear Grant, give me a belter of a Budget (paywalled)

Audrey Young (Herald): National’s Amy Adams on Grant Robertson’s concept of a Wellbeing Budget (paywalled)

Stacey Kirk (Stuff): Economics aside, the Budget rules were self-imposed for entirely political reasons

1News: Anyone who says NZ shouldn’t borrow money is ‘fiscally illiterate’, says top economist after Government changes debt target

Stephen Franks (Interest): Prime Minister Jacinda Ardern says the Government appears to have the balance right given mixed responses to planned changes to its debt target 

RNZ: Government launches service to help young people transition from state care to adulthood

Colin Peacock (RNZ): Mediawatch: Onward Christian politicians

Nita Blake-Persen (RNZ): Destiny Church branch on notice over failure to file annual returns on time

RNZ: PM’s connection to lobbyist raises flags (audio)

1News: Jacinda Ardern’s links with high-powered lobbyist ‘a case of New Zealand being small’

Tim Watkin and Kate Newton (RNZ): Ministerial diaries: Who influences those in power?

Martin van Beynen (Stuff): Is Parliament really such a cesspit?

Colin Peacock (RNZ): Bullying report points the finger at reporters

Audrey Young (Herald): Inner circle: Meet the closest advisers to National Party leader Simon Bridges (paywalled)

Greg Bruce (Herald): Judith Collins on Simon Bridges, all those scandals and what makes her cry (paywalled)

RNZ: Search on in public services to check if staff leaked paper on cannabis referendum

Duncan Garner (Stuff): Flagship KiwiBuild policy in tatters as PM refuses to speak its name

RNZ: Last minute landlords: insulation providers can’t meet demand

Lois Williams (RNZ): New money to house homeless sparks hope in Whangārei

RNZ: Child Poverty Action cautiously welcomes plan to lower some public transport costs

RNZ: Lower public transport fares for low-income households

Michael Morrah (Newshub): Helicopter operators demand ‘complete overhaul’ of aviation safety after years of failures

Nona Pelletier (RNZ): Banks fight back against RBNZ capital increase proposal

RNZ: Bowen House in Wellington investigated for quake risk

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