ANZ economists think Treasury’s pre-election update will suggest an extra $10 billion of Government borrowing as the economic agency corrects its Budget 2023 forecast.
Miles Workman, an economist at ANZ, said new forecasts would show the Government’s fiscal position was much weaker than had been forecast in May.
“Treasury’s economic and tax forecasts are due a downgrade and we suspect that will push the forecast return to operating balance before gains and losses (OBEGAL) surplus out by another year to 2026/27,” Workman said.
Financial statements for the 11 months ended May showed tax revenue was running more than $2 billion below forecast. This doesn’t seem to be temporary and it will need to be baked into pre-election forecasts.
Workman said the Treasury may need to issue an average of $2.5 billion of bonds in each of the next four years, relative to Budget 2023 projections. That’s an extra $10 billion of borrowing taking the total forecast government bond issuance to $130 billion between 2024 and 2027.
That number might have been higher had Finance Minister Grant Robertson not found $4 billion of cost savings across that same period.
“That’s about $1b per year, so not a huge relief when it comes to pressure on Consumer Price Index inflation and interest rates, but every little bit helps,” Workman said.
Budget 2023 increased government spending—operating and capital—by a little over $5 billion in the first fiscal year, or 2023/24.
Workman said the Government had been in a pattern of spending, rather than saving, positive tax revenue surprises which had left it with limited fiscal headroom.
Now that tax forecasts are being revised downwards amid slow economic growth, the Government is having to pull back on spending to stay within its fiscal rules.
“Spending positive cyclical revenue surprises and then cutting spending plans when revenue forecasts deteriorate suggests fiscal policy is moving with the business cycle, opposed to being counter-cyclical,” Workman said.
Push & pull
That can result in fiscal policy working against monetary policy. The International Monetary Fund recently encouraged New Zealand to improve the interaction between these two forces.
Orthodox economic theory suggests that fiscal policy should be counter-cyclical, meaning that it spends when the economy is weak and saves when it is strong.
This helps to smooth out the business cycles and helps support households through periods of high unemployment. But fiscal policy has fallen out of sync during the pandemic, and NZ has increased its spending while the economy was already running too hot.
Workman said the big spending programme in 2020 was well justified, as many expected the pandemic to be the worst economic crisis in a generation.
However, that turned out to be incorrect and by the end of 2021 it was “unambiguously clear” that the economy was running at capacity.
Despite economists saying the economy could not absorb more fiscal support after Budget 2021, the Government delivered two more big budgets in 2022 and 2023.
While Labour has planned a decline in spending over the next four years, future governments have the ability to change that plan in each annual budget.
Currently, Workman and other economists expect the first operating surplus to be in the 2026/27 fiscal year, which would mean seven consecutive deficits in a row.
“If we’re right about that, that would be one more year in deficit than what followed either the Global Financial Crisis or the Canterbury earthquakes, despite these events being very different in terms of their macroeconomic impacts and the consequent appropriateness of persistent fiscal stimulus”.