BusinessNZ Chief Executive Kirk Hope said some of the big ticket items in the Budget would help support business growth.

Chronic skills shortages and other capacity constraints in the construction industry have forced the Treasury to halve its forecast rate of progress on the government’s KiwiBuild affordable housing programme.

Where forecasts before Christmas assumed around $5 billion of KiwiBuild-induced “additional nominal residential investment” over the next five years, the forecast is now for just $2.5 billion over that period.

“A greater proportion is assumed to occur outside the forecast period," says commentary from the Treasury in its Budget Fiscal and Economic Update (BEFU), which is published with the Budget.

Finance Minister Grant Robertson told journalists there was no change to the government’s plan to build 100,000 affordable homes within a 10 year period.

The new forecast makes assumptions about how much extra activity the KiwiBuild scheme will induce and about the impact of government policies intended to alleviate construction sector constraints. These include plans to bring migrant construction workers to New Zealand under a special KiwiBuild visa.

“There remains a high degree of uncertainty about the impact that these policies may have,” Treasury said. “Growth in real residential investment may be weaker than forecast if capacity constraints are more binding than assumed.”

That could also lead to KiwiBuild substituting for “other developments that would otherwise have taken place”.

However, the Budget economic forecasts are bullish about the economic outlook over the next five years, driven by an expectation that immigration will fall by less than previously assumed, prices for New Zealand’s exports will remain strong, and the global economy will continue to grow at a robust rate.

On top of that, the surge in government spending caused by the previously announced July 1 Families Package and other initiatives announced in the Budget are expected to underpin average annual growth of 2.9 percent over the next five years.

The forecasts expect real (inflation-adjusted) growth in gross domestic product in the year to June 2019 of 3.3 percent, followed by 3.4 percent in the year to June 2020, and then falling to 2.4 percent and 2.5 percent in the two following years.

These increases are one of the reasons for higher tax revenue forecasts over the next five years, which underpin a larger government spending programme while allowing it to declare Budget surpluses and meet its debt targets.

Inflation stays at or below 2 percent a year throughout the five-year forecast, lower than forecast average wage increases. Compared to the 1.6 percent wage rise in the year to June last year, the June 2018 annual increase in wages is forecast at 3.2 percent and averages 3.1 percent over the next five years.

The current account deficit remains stable at around 3 percent of GDP, unemployment drifts down close to 4 percent by 2020 and stays there, while participation rates in the workforce remain high by world standards at close to 71 percent over the whole five years.

While business investment takes a hit in the year ahead, with a forecast increase of just 1.4 percent, it recovers to a 5 percent increase in 2020, reflecting the Treasury’s judgement that the current slump in business confidence will be short-lived.

However, it notes that “it is possible that uncertainty around any other reforms and their combined impact leads to more cautious behaviour” by investors.

However, much rests on the assumption that very current high levels of net immigration – 68,000 in the year to March – will fall to 25,000 by 2022. That is 10,000 higher than previous Treasury estimates, reflecting the agency’s decision to reset its migration forecasting to mirror the reality of recent history.

However, it also publishes forecasts from an external agency, Sense Partners, whose forecast suggests net immigration could settle around 40,000 a year, based on combining five different forecasting models.

That would raise economic growth rates, increase employment, worsen housing shortages, probably spark higher house price inflation and is assumed to lead to higher interest rates.

A high-immigration scenario published in the BEFU raises the average growth rate over the next five years to 3.1 percent, produces a larger budget surplus than is officially forecast in the Budget, and would get the government to its Crown debt reduction target a year early.

Also published is a scenario in which global trade protectionism increases beyond levels already accounted for, knocking the growth rate over the next five years down to 2.7 percent a year, producing lower surpluses and causing the government to miss its 2022 target to reduce net Crown debt to 20 percent of GDP by 1.4 percentage points.

The Manufacturers' Network on Budget 2018, released today by the Finance Minister, Grant Robertson, ticked some boxes for the economy, particularly around health, with some investment in infrastructure, education and R&D spending. There was, however, little else for the manufacturing sector to get excited about and not much focused on addressing productivity and skills shortages.

The 2018 Budget’s allocation of $1 billion towards R&D tax credits will be welcomed by exporting and manufacturing firms.

The Taxpayers’ Union is fuming that Minister for Research, Science and Innovation Megan Woods has broken her word and capitulated to Callaghan Innovation’s pressure to keep its precious corporate welfare grant schemes, rather than phasing them out in favour of the new R&D tax credit.

Policies now provide little room in which to manoeuvre

New figures released today by Council of Trade Unions Economist Dr Bill Rosenberg and the Association of Salaried Medical Specialists Director of Policy Lyndon Keene show the health funding gap since 2009/2010 has grown to $2.7 billion. This amount would be needed in Thursday’s Budget to fund services to the same level they were supported in 2010, and pay for new initiatives.

PM Jacinda Ardern has revealed that Deputy PM Winston Peters will take charge as Acting Prime Minister while she is on maternity leave.  Prime Minister Jacinda Ardern has released details of how the running of the country works when she goes on maternity leave and hands the rein to deputy Winston Peters.  In effect, it will be no different to any other time the prime minister is out of the country which automatically renders Peters acting prime minister. But the extended length of time - six weeks Ardern was hoping to take off after giving birth to her first child - heightened the scrutiny of the situation.

LGNZ President Dave Cull welcomes Minister of Local Government Hon Nanaia Mahuta’s announcement today that there will be a Productivity Commission inquiry into local government funding.

Foreign Affairs Minister Winston Peters reaffirmed the Coalition Government’s commitment to restoring lost capacity in New Zealand’s Foreign Service today, announcing a significant increase in funding for the Ministry of Foreign Affairs and Trade.