NZ Budget: English’s Budget To Tilt Economic Dynamics
April 22nd, 2010
In the budget next month Bill English may have to exercise the skill of a Jeremy Clarkson in driving the economy, putting his foot on the accelerator to speed up economic re-balancing, stamping on the brake in holding Govt spending. He’s got to avoid putting it into a tailspin and sliding into the ditch. The Govt is cautiously optimistic about the impact of higher commodity prices in stimulating the export sector, while savings rates are rising and consumption is relatively flat. English believes the budget will tilt the economic dynamics even further in these directions. But as he squeezes hard on the Govt sector (which represents 25% of the economy), he knows many firms dependent on Govt business will be on tight rations. The Crown accounts for the 8 months to February showed corporate tax was down 26%, and the total tax take was down about 10%, actually below what Treasury forecast it would be as recently as last December. This underlines how far corporate profitability has fallen.
The effect has been particularly severe on small and medium businesses, which some say represent the real engine of the NZ economy. In the building and contracting sectors, many firms are hanging on by their finger-tips. This reinforces evidence of how the steam has gone out of the housing and property sectors (which is welcome news in one sense to the Govt). Activity in the domestic economy is likely to remain lack-lustre for some time yet, particularly as the stimulus from rising Govt spending is withdrawn and replaced by a new era of fiscal austerity.
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Duncan Cotterill