Yesterday, finance minister Grant Robertson delivered his first Budget. As expected, it set out the Government’s commitment to what it is calling a “stronger and fairer economy”, while at the same time demonstrating a degree of fiscal prudence. There were few, if any, surprises and it largely delivered on the election promises of the Labour Party, together with those of its coalition partners.
Here are some of the key take-outs:
• The Government has forecast a Budget surplus of $3.1bn this year (ending 30 June), rising to
$7.3bn by 2022. This is higher than what it had forecast at the start of the year.
• There’s increased spending in key areas including health, education and housing. There’s an extra $4bn for health, $1.9bn for education and $1bn for housing (on top of Kiwibuild).
• Spending is to be funded through a number of sources, including repaying debt at a slower pace, a reversal of the previous Government’s proposed tax cuts and higher than expected tax revenues. Additional tax revenues will come from the so-called “Amazon tax” on low value imports and better overall compliance on tax collection.
• The Government has maintained an upbeat outlook for the economy, with GDP growth of 2.9% forecast for this year (ending 30 June), and 3.6% for next year.
• While it’s spending more, the Government is sticking to its fiscal responsibility targets. Debt to GDP remains below the 30% level this year, and is forecast to fall to below 20% by 2022.
Why is the Budget important?
The Budget has important implications for investors as it sets out the overall level of government spending over the coming years. This can impact on the rate of economic growth, as well as inflation and interest rates. It also affects the level of borrowing required to meet its spending plans, which in turn can have an impact on the number of bonds in issuance.
Of course, there’s also an impact on households and businesses. Where households have additional income in their pockets, this can be positive for areas such as the housing market and retail spending. Meanwhile, for businesses, improvements in economic prospects have the ability to affect business owners’ willingness to invest in capital and create new jobs.
How did markets react?
New Zealand’s financial markets took yesterday’s Budget in their stride. By close of business the NZX 50 Index was broadly unchanged, while the yield on the 10-year government bond was up 3 basis points to 2.83%. The New Zealand dollar was marginally higher on a trade-weighted basis. The market’s muted reaction can be put down to the fact that there were no real surprises and the Government’s books are in a strong position relative to many of our international peers.
The implications for investment markets
But what about longer term and how does yesterday’s news shape our investment thinking? Here are some initial thoughts from the team at ANZ Investments:
Craig Brown: Investment Manager, New Zealand equities
“Yesterday’s Budget set out higher spending in key areas, including housing and infrastructure. Naturally this is a positive for companies operating in those areas, such as in construction, housebuilders and other suppliers to these sectors. The Budget doesn’t directly impact on households in terms of leaving them with extra dollars. While this may not provide any additional boost to the consumer and retail sectors, they should at least remain underpinned by falling unemployment and increased minimum wages (previously announced). Unfortunately there was not much in the way for small businesses. With business confidence already at relatively low levels, this could weigh on this sector’s willingness to spend and invest.”
Iain Cox, Investment Manager, New Zealand fixed interest
“To pay for its extra spending, the Government has announced a modest increase in bond issuance of $1bn in each of the next three years, mainly in long-dated bonds. Therefore, we could expect longer-dated bonds to come under pressure and yields to move higher. We do not see any impact on the Official Cash Rate, for now. However, the Government has forecast the economy to grow at a rate of 3.6% next year which, if it does achieve this, could mean higher interest rates are in the pipeline.”
Stuart Millar, Investment Manager, Diversified Strategies
“The additional Government spending should help to underpin growth. Recently, the kiwi dollar has lost ground against the US dollar as fundamentals now appear to be working against it; growth overseas has picked up and interest rates globally are moving higher. Yesterday’s Budget provides impetus for the local economy and this should provide a floor for further weakness in our dollar.”
We take a long term approach to investing
At ANZ we favour an active investment management approach. What this means is that through in-depth analysis and careful research, our investment managers continuously look to pick the winners from the losers. While yesterday’s Budget will no doubt shape the decisions we make about the investments we hold, it’s important to remember that our investment approach doesn’t look to “trade” the market to make short term gains. Instead our time and effort is spent looking for quality investments which we believe will perform over the longer term.
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