Govt action will not stimulate wider economy

Statement made by Jan Dawson, CEO KPMG

CEO KPMG: Government has not found itself able to take action which directly stimulates the wider economy

Overall, the Government’s view seems to be that it is better to deliver benefits to business indirectly through endeavouring to maintain the country’s credit rating, rather than by providing direct economic stimulus. Whether the measures to address the debt position and the projected return to surplus in 2016 are sufficient to maintain New Zealand’s credit rating will become apparent shortly.

For business, Budget 2009 demonstrates that Government, too, is experiencing pain from the global recession. The action we have seen businesses undertake in recent times have been replicated by Government:

• a clear emphasis on cashflow management;

• ensuring the balance sheet is strong and robustly able to support the level of debt being carried;

• review of costs and expenditure to ensure money is spent on priorities rather than entrenched processes;

• pressure on revenue and other income meaning that the effectiveness of spending needs to be scrutinised.

This has meant that Government has not found itself able to take action which directly stimulates the wider economy. However, there is increased spending on health, infrastructure and education as expected. Particularly in relation to infrastructure, detail is scarce on how Government might engage with the private sector, and much planning remains. Businesses will be disappointed that no headline measures to encourage and support innovation have been included.

Of concern is the absence of clear planning for the potential social impacts of increasing unemployment, which is expected to peak at 8% next year.

Revenue is under pressure. Government needs to look again at the tax system and whether it is delivering sufficient revenue in an efficient and robust manner. The recently established Tax Working Group, of which KPMG is part, may assist Government with this exercise.

Some focus has been placed in Budget 2009 on operational expenditure, and more transparency about the effectiveness and efficiency of this spend is needed. The Government, appropriately, has not embarked on an arbitrary “slash and burn” exercise and has – to a point – endeavoured to redirect spending with tactical precision. Nevertheless, taxpayers including businesses, large and small, provide the funding through taxes and charges, and we need it to be clear that those taxes are both necessary and used productively.

In our view, Budget 2009 is like throwing a sea anchor into a stormy ocean – it brings the vessel under control, better able to navigate the turbulent times. However, more will be required to put the vessel back on course. Budget 2009 is buying time for the Government to do that. We expect Budget 2010 to provide more but we will not be surprised to see a continuation of the “rolling maul” referred to recently by the Prime Minister.

The strap line for Budget 2009 is “The Road to Recovery”. While the measures in the Budget may be the first steps along that journey, it paints a picture of a bleak landscape along the way.

In our pre-Budget analysis, KPMG expected that the Government’s current fiscal position will severely limit room for manoeuvre and as a result we expected Budget 2009 to be much more muted that those in the recent past.

The global recession continues to impact on New Zealand with The Treasury concurring with several private sector economic commentators in seeing a recovery, albeit a weak one, commencing in the latter half of 2009. Overall the economy is not expected to see positive annual GDP growth until 2011 and beyond.

The Government’s debt position is a major focus. The obvious and expected steps to shore up the fiscal position have been taken:

• Personal tax cuts scheduled for 2010 and 2011 have been deferred “until economic conditions improve” saving around $900 million annually;

• Contributions to the New Zealand Superannuation Fund are to be suspended until the fiscal position improves to surplus, 11 years until 2020, “saving”$19.5 billion debt until contributions recommence;

• Increased expenditure of $3 billion towards front-line Government services, although of this expenditure in the order of $2 billion has been“reprioritised” to reflect the differing policies and priorities of what is still a relatively new Government, delivering a fiscally neutral result.

ENDS

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