(Bloomberg) -- Bill English, who delivers his annual budget in Wellington Thursday, is finding that record immigration and its drag on public services is eating into money earmarked for new policies and tax cuts. Together with weaker-than-projected tax revenues, that could see him struggle to repeat 2015’s surplus, the nation’s first in seven years.
New Zealand’s net immigration climbed to 68,110 people in the year through April, as more workers and students arrive and fewer Kiwis move to Australia. English said this month that “higher-than-expected population growth” caused him to rework his budget numbers to help cope with increasing pressure on hospitals, schools, infrastructure and the housing market.
In December, the Treasury forecast the budget would return to a NZ$401 million ($270 million) deficit in the year ending June 2016; it updates that forecast on Thursday. English has said the government is less concerned with “minor overs and unders” in the budget balance and more focused on repaying debt.
He aims to reduce debt to 20 percent of GDP by 2020 from 25 percent last year. The government borrowed heavily to maintain public services and welfare payments after the global financial crisis, then to fund the recovery from devastating earthquakes that hit Christchurch in 2010-11. Debt has climbed from as low as 5.5 percent of GDP in 2008.
English has flagged that some spending previously earmarked for the 2017 budget will be used to reduce debt to help reach the 2020 target, while the capital spending allowance -- for one-off investments in infrastructure and other public assets -- will be lower than previously signaled to allow for more repayment.
“We’re not convinced debt repayment should have such an overarching priority at this juncture,” Cameron Bagrie
, chief economist at ANZ
Bank New Zealand in Wellington, said in a note. “We’d like to see the fiscal stance less restrictive to take the pressure off monetary policy, and also more capital investment.”
The government has prioritized cutting debt over tax cuts, English said in a May 12 speech, adding there will be no provision for them in Thursday’s forecasts. It first mooted tax cuts, subject to economic and fiscal conditions, before its re-election for a third term in 2014. Prime Minister John Key last week said they may still be included in 2017’s budget.
Some voters will be hoping for English to address housing affordability on Thursday. New Zealand house prices in April were 37 percent higher than the previous peak in 2007, according to Quotable Value data. In Auckland, home to a third of the nation’s 4.5 million people and the most popular destination for new immigrants, prices have surged 72 percent in that period.
While demand is a driver of the overheated housing market, as are record-low mortgage interest rates, the government is developing plans to increase the supply of homes and land, particularly in Auckland.
“The government could well announce further measures which attempt to address concerns around housing affordability,” Michael Gordon, senior economist at Westpac
Banking Corp. in Auckland, said in a note. “Our inkling is that the focus this year is likely to be on the supply side.”