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Budget 2021: bold and balanced

May 24, 2021


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.


Finance Minister Grant Robertson set the stage for the 2021 Budget in Parliament yesterday when he referenced this year’s Budget against two previous Budgets.

A plant in a small sack, with "2021" stacked on coins beside it

The first was obvious, last year’s COVID-19 recovery Budget, where he threw the kitchen sink at getting us out of the freshly dug hole our economy was in. The second was then National Finance Minister Ruth Richardson’s 1991 “Mother of all Budgets”, which drastically cut spending on the welfare state set up during the Great Depression by the First Labour Government.

This year’s Budget was all about hitting the right balance between putting the public finances on a sounder trajectory after blowing out the books last year, while at the same time realising that we aren’t out of the woods just yet.

With things looking a bit better, the Government signalled a more balanced approach, but was still able to increase spending in areas that addressed the “Wellbeing” theme.

Extra spending in places overdue

The marquee item was a $3.3 billion bump for job-seeker benefit payments. Robertson touted this as a “once in a generation increase” to income support, an attempt to finally turn the corner from the path taken in the early 90s. Other than being an ideological move, the idea is that these households are likely to spend the cash rather than save it, stimulating the economy quickly.

Some of the extra increase in spending will also go towards targeted Māori initiatives. This is the first time Māori have been individually recognised in a Budget announcement, receiving just over $1 billion.

Health and infrastructure were other big gainers. Total spending on infrastructure over the next four years is now $57.3 billion, including last year’s allocation.

While there was some spending earmarked for climate change initiatives, these seemed very light given the pressing concern and the Government’s green stance.

In much better shape than predicted

As widely expected, Treasury upgraded its economic forecasts from Budget 2020 and its December Half Year Update. The table below shows that Treasury is now predicting more tax revenue and fewer expenses, meaning smaller deficits.

Treasury is also expecting the economy to accelerate faster from 2022, with GDP growth reaching a peak of 4.4% in 2023. This number seems high and will require a flawless vaccine rollout and international travel ramping up quickly.

Smaller deficits and better-than-expected GDP forecasts resulted in a slightly rosier picture for our debt burden. Debt-to-GDP is now forecast to peak at 48% in 2023 and start to gradually decline to 43.6% in 2025. This compares to a peak of 53.6% in last year’s Budget.

Market reaction

With less debt needed than expected, the Government does not need to issue as many bonds as previously stated. However, the market was expecting a more significant downward revision than the $10 billion announced, which resulted in NZ government bonds yields going up slightly (more supply drove prices down). The NZD climbed higher overnight.

Keeping the balance

Thanks to a globally renowned response to COVID-19, the economy is back up on its feet, and the books are in better shape than expected 12 months ago.

This, along with an unprecedented parliamentary majority, provided an emboldened Grant Robertson with the ability to increase spending, focusing on the areas of the economy previously left out.

But with all this fiscal freedom riding on very optimistic projections from Treasury, the scales have more likelihood of tipping to the downside. Our tourism and education sectors are still on their knees, and even if we do pull off a swift vaccine rollout (something that has been elusive elsewhere), we still require the rest of the world to be on top of their game too.

Big-ticket items such as infrastructure construction will also prove harder to deliver on. Well known capacity constraints and labour shortages already put these in question. Cost pressures are also beginning to pop up all over the place as a result.

Labour may have the balance in order now, but keeping this balance will be a challenge going forward.

Tags: Economy

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