Economic and Fiscal Update

The Economic and Fiscal Update published by Treasury as part of the Budget papers outlines what the country might see over the next four years. The object is to give an indication of what the economy is most likely to do over the four-year forecast period.

The Update starts with the caveat that drastic uncertainly creates significant challenges when forecasting the economic, tax and fiscal outlook. That uncertainty is compounded by Treasury’s view that it will be some time before an effective COVID-19 vaccine is readily available.

The Update observes that $62.1 billion has been made available to support the COVID-19 response. That comprises the $12.1 billion to date and the $50 billion COVID-19 Response and Recovery Fund. Of the latter, some $10.7 billion is committed to extend the Wage Subsidy Scheme and further tax changes (such as $1.6 billion for the loss carry-back measure). It is anticipated that some $20 billion in fiscal support will be allocated in the year to 30 June 2020 (mainly in the June quarter).

The tax policy changes incorporated in the COVID-19 responses announced to date are costed to result in reductions in tax revenue of $1.2 billion for the year to 30 June 2020 and $2 billion for the year to 30 June 2021.

Economic outlook

Treasury expects real GDP to contract by 25% in the June 2020 quarter. This reflects the time spent in Alert Level 3 and Alert Level 4. Economic activity would recover as restrictions are lifted so that by 31 December 2020 economic activity is around 10% lower.

Treasury assumes that by 1 April 2021 all restrictions will be lifted, including border restrictions. Nonetheless, economic activity in the June 2021 quarter is predicted to be 7% lower than the last forecast before COVID-19.

Treasury estimates that the different alert levels constrain economic activity as follows:
Alert Level 4: by 40%
Alert Level 3: by 25%
Alert Level 2: by 10% to 15%
Alert Level 1: by 5% to 10%

In relation to the international outlook, Treasury notes that the IMF is forecasting the global economy to contract by 3% in the year to 31 December 2020. Global growth is expected to rise to 5.8% in the year to 31 December 2021 (although there is extreme uncertainty around the strength of the global economic recovery).

Household balance sheets

Treasury, perhaps unsurprisingly, observes that COVID-19 will have a significant impact on household balance sheets. Household debt is at historic highs, and indebted households may struggle to meet their repayment obligations as incomes fall. It was added that, despite high levels of debt, debt servicing as a percentage of disposable income is at its lowest level on record. Moreover, some alleviation of pressure can be expected from the intention of the Reserve Bank to keep the official cash rate at 0.25% for at least 12 months (that is, at least until March 2021).

Treasury is hopeful that most households will be able to weather the storm.
Discretionary spending by households is also predicted to fall. Discretionary spending is usually 46% of private consumption. Spending on recreation and culture (11% of private consumption) and restaurants and hotels (6% of private consumption) is likely to be particularly depressed in the near term.

Crown tax revenue

Core Crown tax revenue is forecast to be $82.3 billion for the year to 30 June 2020 (previously forecast to be $88.7 billion), $80.1 billion for the year to 30 June 2021 (previously forecast to be $94.3 billion) and $87.3 billion for the year to 30 June 2022 (previously forecast to be $99.2 billion). In other words, for the first two years, the forecast reduction in core Crown tax revenue is $4.2 billion and $2.2 billion respectively. For those two years, the reductions in corporate tax are expected to be $3.6 billion (2020) and $1.8 billion (2021).

Interestingly, PAYE source deductions are expected to grow by $1.8 billion in 2020 and $0.2 billion in 2021. Although fewer people may be in employment, there is a positive offset through wage growth and fiscal drag.

The impact of tax policy changes is also costed. The policy changes, and their costing, are estimated to be the following:

• building depreciation for industrial and commercial property — nil costs for 2020 and 2021, with a cost of $1 billion for 2022
• loss carry-back of losses made in 2019/20 and 2020/21 — $1.2 billion in 2020 and $1.9 billion in 2021, and
• increasing from $1,000 to $5,000 the threshold for expensing capital purchases — $0.1 billion in 2021 and $0.8 billion in 2022.

For the future, Treasury forecasts that new rules on the allocation of the purchase price across business assets in a purchase transaction will increase core Crown tax revenue by $0.1 billion in each of 2023 and 2024.

Crown expenses

Treasury notes that New Zealand superannuation numbers are expected to increase by 17.5% over the 2020 to 2024 period from 767,000 to 901,000. At the end of 2024 New Zealand superannuation will be around one half of core Crown social assistance and 16.8% of core Crown expenditure.

Contributions to the New Zealand Superannuation Fund are forecast to be $1.5 billion for 2020 and $0.4 billion for 2021. Part of the contributions will be invested through the New Zealand Venture Investment Fund.

Crown finance costs are forecast to grow by around $0.8 billion by 2024. This is primarily because of the interest on the borrowings raised to meet spending. A net operating cash deficit of $21.8 billion is expected for 2019/20.

Tax policy changes

Treasury notes the proposal to relax the loss continuity rules in order to encourage the growth of start-up companies. A discussion document on the topic is foreshadowed.
In relation to other possible tax policy changes, Treasury observed that the focus of the Inland Revenue work programme will be on supporting New Zealand businesses through the COVID-19 crisis and facilitating the recovery.

Treasury also noted that tax in dispute under challenge proceedings is $141 million as at 31 March 2020. This is a slight increase from the $134 million tax in dispute as at 30 June 2019.

Borrowings

Treasury is forecasting that for the year to 30 June 2020 Government borrowings through bonds and bills will be $74.29 billion (previously forecast to be $65.33 billion). The borrowings for these items are forecast to be $112.67 billion for 2021.

Borrowing through settlement deposits with the Reserve Bank are expected to be $35.75 billion for 2020 and $66.83 billion for 2021.
After some adjustments, gross sovereign-issued debt (exclusive of Reserve Bank settlement cash and bills) is expected to be $99.7 billion for 2020 and $138.1 billion for 2021.

Tax take

Treasury projects that the tax revenue from individuals, corporates and GST for 2020 and 2021 will be the following:

• individuals — $39.1 billion (2020) and $38.6 billion (2021)
• corporates — $12.4 billion (2020) and $8.9 billion (2021)
• GST — $19.6 billion (2020) and $19.7 billion (2021).
• ACC levies are forecast to raise $2.9 billion in 2020 and 2021.