Next Thursday Finance Minister Grant Robertson will deliver his fourth Budget, and his first unencumbered by coalition politics and horse trading. What can we expect?
This will be a Labour Budget. We can expect more spending on traditional Labour priorities like health, education, and welfare. There will be a focus on things like a ‘just transition’ to a low emissions economy; new technologies to lift productivity and support for getting people into work; efforts to lift Maori and Pacific incomes, skills, and opportunities; programmes to reduce child poverty and improve child wellbeing; and initiatives to improve people’s physical health and mental wellbeing.
All of these are admirable but much will depend on what policies will be put in place to translate aspiration and promises of more spending into tangible outcomes that make a real difference and help the economy deliver more jobs and higher incomes, not to mention the tax revenue to pay for more spending, debt repayment, or tax relief.
The good news is the economic and fiscal landscape is a lot less ugly than it was a year ago.
The 2020 Budget was delivered in the midst of the national lockdown and forecast a deep slump in GDP and a big jump in unemployment. The Government was staring down the barrel at massive fiscal deficits and years of red ink. Net core government debt was forecast to surge to over $200 billion by 2023/24.
Fast forward a year and carnage did not eventuate. Massive monetary and fiscal support and the stamping out of the virus helped GDP bounce back after the national lockdown while unemployment has not turned out to be nearly as bad as feared. Commodity prices have surged to record levels, the housing market has been running hot, and retail sales have been robust, except in tourism dominated sectors like accommodation and hospitality.
Farmers played a key role too. They delivered last year when food production was able to continue operating during the toughest period of lockdown. Agriculture has dominated our exports and higher farmgate prices for milk and meat are keeping regional economies afloat.
A better than expected economy has flowed through to the fiscals. Successive updates have shown progressively better results. For the nine months to the end of March, the operating balance before gains and losses was ‘only’ $4.3 billion, compared to the half-year update’s forecast $9.4 billion. Net core Crown debt at $105.3 billion was $6.6 billion less than forecast in December, although it’s still more than $40 billion up on the same time last year.
Budget 2021’s starting point provides the Government more options than looked possible a year ago. But it’s not all plain sailing. The economy lost steam towards the end of last year and this year is likely to be patchy and uneven, especially the longer border restrictions remain. The travel bubble with Australia is great but international tourism will take a long, long time to recover even when the borders eventually open to visitors from other countries.
Budget 2021 must deliver a credible roadmap for post-COVID recovery which sets out a path to a strong productive economy, including agriculture. Wider wellbeing goals in the social and environmental space won’t be achieved if the economy is weak, jobs aren’t being created, and tax revenue isn’t flowing.
A road map shouldn’t mean a return to a command and control economy like the 1970s and 80s when we had big government planning and ‘fine tuning’ the economy. In those days New Zealand regulated, protected, taxed, spent, and borrowed like crazy in a futile attempt to maintain living standards that increasingly failed to reflect worsening economic performance. Lagging incomes, high unemployment, runaway inflation, industrial strife, and mass emigration were the result. The whole edifice collapsed dramatically under its own weight in 1984 and required painful, but ultimately worthwhile, reforms – including the end of agricultural subsidies.
No one should want to go through all that pain again but there is a definite 1970s feeling in the air with lessons seemingly forgotten. Ministers have talked openly about wanting to see a bigger more activist state to rebuild the economy and address challenges like climate change and inequality.
A tsunami of new policies and regulations is swamping business and farmers leaving many bewildered by the pace of change not to mention the direction of that change, which is increasingly interventionist. The latest is the so-called ‘Fair Pay Agreements’ where the Government wants to grow union power and unleash them on employers, including small businesses. Few politicians or policy makers seem to care much about inflation or rising debt or fiscal deficits. Some seem to think we can just print money indefinitely.
Federated Farmers shares the Government’s aspirations for a better New Zealand, but we prefer different means to those ends. We want an unrelenting focus on policies that will make the economy more productive and encourage a better business environment so firms and farms can invest and employ with confidence.
We support a return to surplus and for debt to be reduced over time to get us in a better position to withstand the next economic shock and, in the longer term, cope with the impacts of an ageing population.
We want government spending focused on programmes and projects that deliver strong value for money. All its spending should be appropriately phased, controlled, and directed to maximise its benefits. Outcomes should be what is important not simply the amount of spend.
If there is to be further fiscal stimulus, it should be delivered via tax relief rather than yet more spending which would risk being unproductive and wasteful.
The Government should also commit to better quality regulation through supporting the Regulatory Standards Bill and being serious about rigorous analysis. It should stop or at least soften changes that threaten to choke the life out of businesses, including our farmers who are so crucial for export growth.
New Zealand is at an economic turning point. As we set course for the 2020’s we can either carry on with responsible economic policy which has served us well for most of the past 35 years, which arrested the slide in living standards and made our economy much more resilient to shocks. Or we could move off in an uncertain, risky direction of bigger more activist government. Budget 2021 will be a key marker for setting that course.
Drought hits North Island livestock.
Last year’s severe drought had a big impact on North Island livestock numbers, according to the final results from Statistics NZ’s Agricultural Production Survey.
On 30 June 2020 there were 26.03 million sheep, down 3.0% from June 2019. The South Island was down 0.6% to 13.58 million, while the North Island was down 5.4% to 12.45 million. Northland, Hawkes Bay, Taranaki, and Tasman all had double digit percent declines. Nelson, Marlborough, and Southland had increases.
On 30 June 2020 there were 6.2 million dairy cattle, down 1.0% from June 2019. The South Island was up 4.2% to 2.54 million, while the North Island was down 4.3% to 3.66 million. The percent biggest declines were in Tasman, Bay of Plenty, Northland, Manawatu-Whanganui, and Taranaki, while there were increases in Wellington, West Coast, Canterbury, Otago, and Southland.
On 30 June 2020 there were 3.88 million beef cattle, down 0.2% from June 2019. The South Island was up 5.3% to 1.25 million, while the North Island was down 2.6% to 2.64 million. Hawkes Bay had the biggest percent decline, followed by Tasman and Auckland. The biggest increases were in Marlborough, Southland, and Canterbury.
On 30 June 2020 there were 0.83 million deer, up 2.8% from June 2019. Both the South Island and North Island had 2.8% increases to 0.58 million and 0.25 million respectively.
For the year to 30 June 2020 453,700 tonnes of grain were harvested, up 14.0% on the previous year. Canterbury’s share of wheat was 82% and the South Island’s in total was 97%. 337,700 tonnes of barley were harvested, down 12.0%. Again, Canterbury was the dominant barley region with 67% and the South Island’s share was 85%.
It was a different story for maize, with 190,100 tonnes of maize grain harvested, down 3.0%. The North Island’s share of maize was 97%.
Food prices up in April.
Higher vegetable prices pushed food prices up 1.1% in April compared to March, according to Statistics NZ’s monthly Food Price Index. They were up 0.7% after seasonal adjustment.
On an annual basis food prices were up 0.7%. Comparing April 2021 with April 2020:
- Fruit and vegetable prices rose 6.0%, with vegetables up 4.4% and fruit up 8.3%.
- Meat, poultry, and fish prices dropped 2.2%, with beef and veal down 2.9% and mutton, lamb, and hogget down 0.6%.
- Grocery food prices dropped 0.1%, with bread and cereals down 1.3% and milk, cheese, and eggs down 0.1%.
Retail spending up in April.
Statistics NZ’s monthly Electronic Card Transactions has shown a strong pick-up in retail sales in April.
Spending in retail industries rose a seasonally-adjusted 4.0% in April compared to March. The strongest increases were for apparel up 8.3% and fuel up 5.1%. Durables (e.g., furniture, electrical, hardware, department stores, recreational goods, etc.) were up 1.3% and consumables (e.g., supermarkets and groceries) were up 1.0%. Vehicles (excluding fuel) were down 0.2%.
Compared to April 2020, April 2021’s retail sales were up 108.7%. April 2020 was the height of the severe COVID lockdown which shut down most retail industries and severely distorts the year-on-year comparison.
Is the housing market slowing?
The median house sales price dipped slightly in April but remains at a near record high, according to the Real Estate Institute of NZ’s monthly Residential Market Statistics.
In April 2021 the median house sales price was $810,000, down from $825,000 in March but still up 19.1% compared to April 2020’s $680,000.
All regions had at least double digit annual percentage increases, with the biggest being for Gisborne (up 72.5%), Otago (up 58.8%), Marlborough (up 46.1%), Taranaki (up 42.2%), and Waikato (up 37.7%).
House sales volumes slumped 28.0% month-on-month to 7,218. Partly the decline was seasonal but REINZ also thinks it might reflect reintroduced LVRs slowing the market, the impact of the Government’s 23 March tax announcement, and a particularly low inventory of houses for sale.
Traffic volumes mixed in April.
ANZ’s monthly Truckometer paints a mixed picture for light and heavy traffic volumes between March and April while annual comparisons show great volatility.
The light traffic index was up 0.6% for the month while the heavy traffic index was down 1.2%. The annual comparisons reflect the bounce back from the severe lockdown this time last year, with light traffic volumes up 53.7% compared to April 2020 and heavy traffic volumes up 38.9%.
ANZ observed that the data is consistent with a picture of accelerating economic momentum. The monthly dip for heavy traffic might reflect logistical challenges with changes in shipping and trucking patterns.
Job ads jump.
The BNZ-Seek Employment Report showed 12.2% leap in job ads in April compared to March, following on from a similarly sized 12.5% jump from February to March. Annual growth was a massive 354.6% but this reflects the point of comparison (April 2020) being at the depths of lockdown.
All industries experienced a monthly increase in job ads, with hospitality and tourism having the biggest increase (43%), probably thanks to the trans-Tasman travel bubble. Growth in the farming, animals, and conservation industry was a much more subdued 3%.
Banking Survey thank you.
A big thank you to the 1,152 farmers who completed our latest six-monthly Banking Survey, which gives us an important handle on farmers’ relationships with their banks. Research First is now analysing the responses for us and we expect to release the results later in May. Watch this space.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 13 May) continue to show soil conditions becoming drier than usual, with a growing number of ‘red’ areas especially on the east coasts of both islands.
The NZ Dollar was down 0.9% for the week against the Trade Weighted Index, weakening against all our major trading partners.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week the yield for the 90 Day Bank Bill was unchanged on 0.37%. However, the 10 year Government Bond yield was up 18 points, to be up 28 points since the end of April.
The Reserve Bank will next review monetary policy settings (including the OCR) on 26 May.
|This Week (13/5/21)||Last Week (6/5/21)||Last Month (13/4/21)||Last Year (13/5/20)|
|90 Day Bank Bill||0.37%||0.37%||0.32%||0.26%|
|10 Year Government Bond||1.90%||1.72%||1.75%||0.58%|
Source: Reserve Bank of NZ