JP Morgan's NZ Budget08 Tips

New Zealand's Finance Minister Michael Cullen will deliver his ninth Budget on Thursday. Here are some key points to note.

2008 Budget

The Budget will focus on three main areas:

• providing relief for workers under pressure from rising prices for food and energy,
• investment in infrastructure and public and support,
• and a long term economic plan with a view towards greater sustainability and greater prosperity for families.

The personal income tax cuts probably will be $25 per week for the average household, totalling NZ$2.5 billion this year.

Larger tax cuts would be politically attractive - the government trails badly in opinion polls - but economically irresponsible given high inflation. RBNZ officials believe that tax cuts totalling more than $1.5 billion will be inflationary.

Tax cuts will be paid mainly via adjustments to income tax thresholds. That said, it is possible that the bottom income tax rate will be cut.

Tax cuts will be delivered within the government's goal of keeping public debt at around 20% of GDP.

No tax free threshold will be announced.

No change to the GST will be announced.

There is likely to be a big push on broadband and infrastructure spending.

The government will likely signal a significant reduction in new spending beyond 2009, set at $2 billion a year in December.

Various spending commitments currently total around $4 billion. Extra funding already announced includes:

- $750 million for health
- $700 million for the Fast Forward fund to promote research in the food and pastoral sector
- $621 million for Foreign Affairs and Trade
- $446 million for community organisations
- $33.5 million over for years for the Canterbury region
- $244 million over 10 years to implement regional transport projects

In the half yearly update in December, the Treasury forecast an operating surplus (OBEGAL) of NZ$6.4 billion in the year ending June 2008. In the nine months to March, however, the operating surplus totalled only NZ$1.1 billion. This is NZ$4 billion less than forecast, mainly owing to $3.5 billion in losses of the NZ Super Fund, Accident Compensation Corporation, and Earthquake Commission. Assuming that the $1.3 billion ($6.4 bn -$5.1 bn) forecast for 2Q is achieved, the OBEGAL for 2007/08 will total around NZ$2.4 billion.

The 2008/09 OBEGAL was forecast at $4.1 billion in December. This we believe is overestimated as the moderation in economic growth will lead to a decline in revenues. The OBEGAL for 2008/09 will likely come in to the tune of NZ$3.5 billion when the Budget is announced tomorrow.

Impact on monetary policy

The fiscal stimulus will be front loaded, meaning that income tax cuts beyond the forthcoming fiscal year will be less than the $2.5 billion we anticipate in the 2008 Budget. The near term boost to disposable income, though, should be enough to prevent the RBNZ easing monetary policy in coming months, even though the indicators of domestic economic growth have weakened significantly. Our forecast calls for the RBNZ to cut the OCR 25bp in October and by another 25bp in December, taking the key rate to 7.75% by year end.

Regards,

Helen Kevans
Economist
J.P. Morgan Securities Australia Limited

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