WARNING… Government Budget Impact on NZ Corporate Governance…

If Treasury’s economic assumptions are wrong then the economic impact on business will be significant triggering the need for enlightened Boards to develop risk mitigation strategies.

Board Strategic Performance Plans at Risk… I’m Doug Marsh Advisor to Boards, and I want to alert board directors to the systemic risk of economic impact of unrealism between Labour’s Budget and Treasury’s optimistic assumptions underpinning budget decisions.

Budget 2019 announced more taxes, $3.8b more spending, more debt, a climate of risk of slowing economy, higher corporate bank charges uncertain commodity prices, volatile financial markets and geo political tensions.

The underlying assumptions driving the budget were a growth rate of 2.6% over the next four years, a surplus of $1.3b 2019 rising to $6.1b by 2023. This surplus is despite net operating spending increasing $15.3b over the same period.

There is therefore heavy dependency upon Treasury forecasts being accurate!

Concerns have been made by those in the know, that Treasury's economic forecasts are optimistic. The low weight probability of happening in relation to aspects of NZ & global negative indicator red flags have influenced a Budget that is flawed.

Government might get into trouble with its exaggerated promises and high spending plans.

Given Treasury gross neglect releasing the budget prematurely - it has Board’s scratching heads over Treasury’s economic forecasting capabilities, amidst a laughable housing forecast debacle.

Labour’s spending relies heavily upon Tax take forecast accuracy & GDP growth. And that is influenced by Business success, Business growth, and Business confidence.

There are many variables and internal as well as global economic uncertainties impacting on GDP growth & tax take forecasts being achievable.

If business agrees with the following then there is a disconnect between Treasury forecasts and business confidence in the budget.

Recent economic events have impacted negatively on business investment and are unlikely to change because of budget flaws & economic UNCERTAINTIES including - domestic and international negative sentiment, exchange rate terms of trade volatility, financial market change, business confidence decline, pending Industrial Relations legislation Union Business Relations impact, rising corporate bank fees costs of borrowing, & rising costs of production, all affect future profitability.

In the US, economic growth is expected to ease over the next year as the impact of the fiscal stimulus wanes.

There is risk that deterioration in market sentiment could lead to tighter global financial market conditions. Persistently weaker global economic trends, UK withdrawing from the European Union (EU) without a deal Us tariffs on Mexican imports, Middle East turmoil may cause further chaotic economic deterioration. Key among global risk is the seriously escalating US/China trade tariff impasse, together with Brexit - as an absolute will affect NZ.

There remains underlying concern about high agricultural debt & dairy meat export market commodity uncertainty. Oil import price rise uncertainty.

Fuel increase 3.5cents per litre from 1st July, plus increased road user charges.

Government Net Core Crown Debt $5b increase by 2023 will leave the Government in a tight spot without overlaying the negative impacts of Treasury optimistic economic assumptions.

By 2022 net debt to GDP of 19.95 per cent is forecasted. That’s only $180m within its 20 per cent debt target.

Government’s total borrowings are forecasted to increase from $112b in 2019 to $131b in 2023. The 2023 projection is $8b higher than forecast in the Half Year Update.

Crown debt as a percentage of GDP isn’t forecasted to exceed 21% – even after 2022 when the Government’s debt target will broaden from 20%, to 15% to 25%!

But If Treasury’s growth forecasts prove wrong as indeed appears probable - the Government will have no choice but to cut spending, increase taxes or break promises to New Zealanders yet again! The impact on Business confidence will be explosive. (apologies - “targets have been scrapped by Labour so there are less quantifiable measures but more wriggle room for Government

While Governments’ $300m venture capital & $200m training grants are welcomed by business it will do little to stave off economic contraction forcing Government into breaking its self-imposed targets siting unpredictable external economic forces. (apologies - “targets have been scrapped by Labour so there are less quantifiable measures but more wriggle room for Government).

Hence the need for boards to be giving consideration to their future curve strategic planning and the need for learned Boards to be developing risk mitigation strategies, failing that count on surprise, anxiety and explaining.

I’m Doug Marsh, (Rtd) Professional Chairman & Director, Inaugural President Business NZ Hon.Consul and Champion for elevating Governance practises.

Advisor to Boards and available for strategic leadership performance briefings & reviews for NZ’s enlightened Boards.