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Budget 2019: a work in progress

May 31, 2019

Benjamin Wilton

Written by Benjamin Wilton

Fixed Income Analyst at Kiwi Invest Ben’s responsibilities include credit analysis and identifying investment themes across regions, sectors and industries.

Kiwi Wealth analyst Ben Wilton takes a look at what’s in store for the year

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The 2019 Budget was released yesterday, although it seemed more like a weeklong event thanks to some - erm- hiccups on Tuesday.

Within the official release, the Government made good on some of its core election promises by emphasising mental health initiatives and child poverty reduction.

As usual, forecasts for spending and borrowing were slightly more substantial compared to the Half-Year Update back in December, but all within the limits of the Government’s recently revised 15-25% net debt/ Gross Domestic Product (GDP) band.

No issues with more issuance

One detail you won't likely hear about in mainstream media but was headline news for us fixed income folk, was the announcement that the Debt Management Office's (DMO) bond issuance programme was given a larger than expected boost. This looks a smart move to us, as global interest rates are hitting record lows with little sign of change. Gross issuance of bonds is now expected to total $42 billion over the next five years, $5 billion more than was forecast in December.

Growth expectations higher than expected

One of the biggest takeaways we get from the Budget, other than the areas where our money will be thrown towards, is the Treasury's feeling for economic growth over the next five years.

They are now punting on an average annual increase in GDP of 2.6%, hardly shifting the dial since brighter times six months ago.

This seems a little optimistic given the well-known capacity constraints and waning business confidence at home; not to mention a deteriorating outlook for growth in the global arena.

 We see some downside risk in this forecast, which could see lower tax revenues, making it harder to splash out in future Budgets.

Market response

The New Zealand dollar hardly skipped a beat after the official release, but the 10-year NZ Government bond yield initially jumped around 3 basis points, largely because of the DMO being given the green light to increase its issuance programme.

A shift in the right direction:

The Government showcased this year's Budget as the first "Wellbeing Budget".

This simple tweak to the name may seem like a bit of a charm offensive, given the title incorporates many of the key issues the Labour Party campaigned on.

However, it also represents a significant shift from how Budgets have previously been developed and presented.

We are seeing a shift away from obsessing over GDP as the sole focus, and more towards social wellbeing becoming the driver of the framework. This new approach is welcome. More spending on mental health is especially something I think every New Zealander would agree on, as it’s a challenge every one of us faces in some way or another. Nonetheless, the jury is out on whether this move will translate into tangible results.

This article reflects the personal views of the author at the date shown above. The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any investment decisions.

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