Deutsche Bank Data Flash: Budget Policy Statement
Thursday, March 9th 2000, 12:00AM
Key points - economy
The Treasury is forecasting a more pronounced economic cycle than was previously the case. This reflects stronger than expected growth in Q3/99 and thus less spare capacity to support non-inflationary growth in subsequent years.
GDP is expected to grow by 3.6% in 1999/2000, 3.7% in 2000/01, 2.7% in 2001/02, and 2.1% in 2002/03, compared with the PREFU forecasts of 2.3%, 3.5%, 3.3% and 2.9% respectively.
CPI inflation is forecast to be 1.9% in the year to Q1/2000, and remain at or above 2% over each of the following four years at 2.4%, 2.3%, 2.2% and 2.0%.
Underlying the Treasury outlook is an assumed significant tightening in monetary conditions: - 90 day rates are assumed to rise to 7.3% by Q1/2001 and 7.8% by Q1/2002, before falling slightly to 7.5% by Q1/2003. - The TWI is expected to rise from an assumed 54.2 in Q1/2000 to 61.5 by Q1/2003, implying an MCI of 424 at that point compared to -422 at present.
The current account deficit is forecast to peak at 8.5% of GDP in the year to Q1/2000 as a result of temporary factors (rising oil prices, importation of another naval frigate etc). Nonetheless, sub-6% deficits are not expected until 2002/03.
Key points - fiscal policy
An operating surplus of $0.4 billion (0.4% of GDP) is forecast for the year to June 2000 (FY2000), compared with the $14 million PREFU forecast. Over subsequent years the surplus is projected to rise to 1.0%, 1.9% and 2.2% of GDP.
Net debt is projected to fall from around 22% of GDP in FY2000 to 18.5% in FY 2004.
The forecast indicates a stronger-than-expected cash flow for FY2000. At this stage the bond programme remains unchanged from that announced with the PREFU, though the programme will be reviewed as more information becomes available during Budget preparations. Given the probability of a June Budget, the June 22 tender is the mostly likely candidate for cancellation.
The Government has stated that its fiscal policy approach will be guided by the following parameters: - Keeping net debt below 20% of GDP on average over the economic cycle. - Keeping expenses around current levels of 35% of GDP. - Running operating surpluses to enable ongoing contributions to the Government's proposed superannuation fund.
Contributions will be made to the proposed superannuation fund from 2001/02. The forecasts assume $0.6 billion in 2001/02, $1.2 billion in 2002/03, $1.8 billion in 2003/04 (subject to change once the Government has finalised its policy). These contributions are funded partially from the cancellation of the previous Government's planned tax cuts and the increase in the top marginal personal income tax rate to 39%.
Commentary
As Dr Cullen commented, the Treasury forecasts are likely to provide a reasonable guide as to what the RBNZ will project on 15 March: - A strong GDP growth profile - A significant and prolonged increase in CPI inflation above the mid-point of the 0 to 3% target range. - An assumed recovery of the TWI from recent lows, although to a lower endpoint than projected in November. - An implied stronger contribution from interest rates to the monetary tightening process, with a projected 90 day rate for H2/01 of around 7.3% compared to the November forecast of 6.6%.
Since the Treasury forecasts were finalised, the NZD has shown further weakness while oil prices have risen substantially. The Reserve Bank forecasts are likely to incorporate these developments to some extent, resulting other things equal in stronger inflation pressures, at least over the next year to 18 months.
Nothing in the BPS leads us to change our view that the Reserve Bank will initiate a 50bps tightening of the cash rate on 15 March, with more to come over following months.
Market reaction: the BPS forecasts were broadly in line with market expectations. However, the NZD fell around 20 points in response to the bearish current account forecast and comments by Dr Cullen that S&P's decision on NZ's credit rating was imminent and that a downgrade was possible if S&P focussed on the current account deficit.
Treasury's Economic Outlook
2000 2001 2.002 2.003 2004
%GDP Forecast Projection Projection Projection Projection
Operating Balance 0.4% 0.9% 1.6% 1.8% 2.1%
Net Debt 21.9% 20.9% 19.6% 18.9% 18.5%
Net Worth 6.6% 7.1% 8.4% 9.9% 11.5%
Gross Debt 33.7% 32.1% 30.5% 30.0% 29.7%
Revenue 34.8% 34.6% 34.8% 34.8% 34.7%
Expenses 34.9% 34.3% 33.7% 33.5% 33.3%
Source: Treasury
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