ANZ economist believes the Government may have to reprioritise some of its spending if it wants to reduce debt and reach its other fiscal targets

Cartoon of Grant Robertson by Jacky Carpenter

Bank economists expect the Government’s books to stay in the black over the next five years, but warn it’ll have little wiggle room as it follows through on its spending commitments while reducing debt.

They believe Treasury’s Half-Year Economic and Fiscal Update (HYEFU), released on Thursday, will show there’s room to accommodate the Government’s promises - even if surpluses are smaller and debt levels larger than previously forecasted.

ANZ’s senior economist, Phil Borkin, says, “The big issue for us is that we suspect the figures won’t show a great deal of wriggle room.

“At face value the broad spirit of the numbers will look good. New Zealand’s fiscal accounts will still be strong relative to many international peers, and that should not be discounted.

“However, a lot hinges on the economy continuing to perform well.

“Given our more circumspect views on the growth outlook, risks to costs that are really pointed only one way, and the realities of keeping coalition partners happy, there is not a lot of room to manoeuvre if things don’t go entirely to plan (which things seldom do).

“It sets the scene for some fiscal slippage, forcing the Government to either ease back on its fiscal targets or look at reprioritising some of its spending plans.

“We suspect it will focus on the latter, which means after what is likely to be a boomer of a 2018 Budget, things could get tighter from Budgets 2019 and beyond.”

Targets & spending plans

The Government’s fiscal targets include:

  • Reducing net Crown debt from 22% to 20% of GDP by 2022;
  • Maintaining expenditure at around 30% of GDP;
  • Delivering sustainable operating surpluses across an economic cycle;
  • Resuming contributions to the New Zealand Superannuation Fund;
  • Rejecting the previous government’s tax cuts and reviewing the tax system.

Some of the Government’s major spending plans include:

  • Introducing a major Families Package, including a boost to Working for Families, introducing a payment for children under three, contributing to super-annuitants’ and beneficiaries power bills, and boosting the Accommodation Supplement;
  • Building 100,000 affordable homes for first home buyers over the next 10 years;
  • Providing fees-free tertiary education and training and increasing student loan living cost limits and allowances;
  • Extending Paid Parental Leave from 18 to 26 weeks;
  • Investing more in the health sector;
  • Investing in light rail from Auckland’s CBD to the airport.

ANZ expects Treasury will have to cut its projected operating balance excluding gains and losses (OBEGAL) from 1% to 0.8% of GDP for the year to June 2018. Going through to 2022, it sees Treasury reducing its OBEGAL from 2.4% to 1.6% of GDP.

ASB isn’t as upbeat. It expects the OBEGAL will only reach 1.0% of GDP by 2022.

Yet both ASB and ANZ have confidence in Crown debt falling to 20% of GDP by 2022. Under the National-led Government, Treasury had expected this point to be reached by 2020.

ASB economists say: “Indeed, the economic outlook has deteriorated since the PREFU [Pre-Election Economic and Fiscal Update] back in August.

“Our forecasts show lower growth than the Treasury’s, particularly over 2018/19.

“However, we are more optimistic around wage growth than the Treasury was back in the PREFU, given the minimum wage increases and changes to migration policy.”

Both banks’ economists see higher debt levels translating into a larger bond tender programme.

ASB economists expect $12 billion of extra bonds will be issued over five years, while ANZ’s Borkin believes an extra $8 billion will be issued.

“We don’t see too many issues with the market absorbing that,” he says.

“On top of that, we suspect the Treasury will continue to project a reasonably solid economic outlook.

“Within the PREFU, the Treasury forecast strong real GDP growth of 3.2% and 3.7% in the years to June 2018 and 2019 respectively. Nominal GDP growth was forecast to average close to 5% per year over the next five years.

“While it is possible that near-term growth forecasts are downgraded modestly, we think the Treasury will maintain an upbeat medium-term prognosis. That sets the scene for a still-decent profile for revenue growth.”

Presbyterian roots

Finance Minister Grant Robertson has reiterated his prudence, on Monday referring to his Presbyterian roots in a speech to the Auckland Chamber of Commerce.  

“This twin approach of investing to deliver social justice while being responsible with our finances very much mirrors who I am and my background,” he says.

“We can pay for the plans we have made and the policies in the agreements we have signed. But there are still other cost pressures to meet and programmes to deliver.

“I have asked my Ministerial colleagues to re-assess current programmes to ensure they match this Government’s priorities and are value for money. Any such re-prioritisations will be reinvested to meet the cost pressures we face.”

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16 Comments

I am expecting a hole.

I'm not, and if there is it will be readjusting for the creative accounting of the previous regime of quasi moteliers.

I am expecting a canyon to challenge The Grand Canyon

Would not be surprised. Seems like they have found quite a few holes since they started investigating the state of things.

Rick, you have stated that you voted National in the past, yet I struggle to think of one of your numerous posts that has any praise for something National has done, ever. Similar to Kate (although as a lecturer I had her in the 'Red' pigeon hole from Day 1). Can you point to one?

He has often praised John Key for calling out the housing crisis in 2008 as part of his campaigning.

I recall that, however it always seemed to be accompanied by a 'but'.

For the record, I have no issue what political alliances posters have, except if there is an element of manipulation e.g. A common tactic employed in missionary narratives is "I used to be into XYZ, but I saw the light and found comfort in ABC". It may be true, but often isn't.

Well, I can think off the top of my head of a number of things they did right and things that the previous Labour government did that I was not a fan of.

National did well:

1. Cycle lanes
2. Roads of national significance that were worth doing
3. Investing in Ultrafast Broadband as a public good (this one is a fantastic investment for the country)
4. Getting a lot of treaty negotiations done and dusted
5. Stimulus rather than austerity in response to the GFC (in fairness, a couple of earthquakes helped drive the need for this). This was a good approach to the GFC.

At the time the Clark was prime minister, (for example) I wasn't a fan of Working for Families being introduced at all and would've preferred National to actually address this "communism by stealth" (as they called it). I voted for Key twice (different elections, obviously) and celebrated getting rid of Labour.

Having lived and worked in third world countries and developed a real aversion to unethical behaviour, and that has driven my aversion to some of National's recent form. I can think of a few things that the Clark government that really pissed me off in this regard, but far more under National.

And I guess I expected National to follow their words with actions - especially re taking seriously the housing crisis that they campaigned on. Refusing to admit its very existence for the next nine years was simply unconscionable. Beyond that, it's been the seeming willingness to pander to their older voters ultimately at a cost to young and future Kiwis that has irked me and prompted my present antipathy.

Would be nice to address some fundamental issues so we can get rid of the unnecessary socialist redistribution policies that paper over the gaps - e.g. Working for Families, the Accommodation Supplement, the First Home Buyers supplement, and some others of the benefit load.

I'm a great believer in what the great conservative Edmund Burke noted, that

a culture, a society is not simply about us here now, but it is a deal between the dead, the living and those yet to be born. And that you cannot break that pact, and that what you have inherited you do not have the right to give away, any more than you have the right to destroy future generations of your own family or future generations yet unborn, it is a very central pact of civilisation, that deal, between the dead, the living and the yet to be born.

If you give it up and say it doesn't matter if the next generations' society resembles Mogadishu more than Stockholm, then you are breaking that pact.

It's true I've voted for National far more than any party and never for Labour. I was always a conservative with a strong streak of ensuring opportunities exist for others - hence how I ended up in anti-poverty work in the Third World. Hence my antipathy that's been prompted by what I see as a refusal to admit and address some major problems in NZ (including the one they campaigned on), along some cynical actions and ethical decisions (e.g. now we see that Key lied re surveillance). I do think we need some change in this regard - and that may take a different party to National, based on NZ's track record...e.g. the time that National and Labour swapped places and Labour liberalised the economy and did away with National's price freeze etc. Perhaps National will never take major steps, because it's not in their nature?

I do think the dichotomy we pretend to have in NZ (capitalism vs. socialist) is a tad ridiculous, as both our major parties are rather socialist in nature anyway. I do reckon if you and I were to plot many of our policy stances we'd find pretty significant alignment. And really, I don't object to Labour having a turn, and I can't take seriously the idea that they'll turn NZ into a communist country any more than National have.

At the end of the day, you can't just kick cans down the road for other people to pick up and talk about snapper instead.

I should note, too, that the holes I refer to are ones we probably know will have arisen as deferring spending has been a part of balancing finances since the GFC. But we will have to pay the piper at some stage if Kiwis expect reasonable social services, and perhaps we face an ideological problem when we see taxes as evil theft but still feel entitled to the services we want, while its the services for others that should reduce?

E.g. We knew when Judith Collins called Key and English out publicly for underfunding the police and when numbers per capita were down significantly that deferred spending on necessaries may just be an issue.

It's all a silly game called politics.

The opposition makes election promises with cursory consideration for the fiscal realities. Generally the size of the promises are inversely proportional to the probability of being elected.

Whoever in the game manages to get elected then gets the briefing from Treasury, who one assumes must slap all in coming governments with the wet fish of reality. This inevitably creates a fiscal gap. Thus we are taught yet again that, in theory, reality and theory are the same, its only in reality that theory is different.

Luckily, regardless of the performance of the previous government, there is always the well worn path of blaming the outgoing administration. Tried and true sayings like, 'Much worse than expected", and "Misled by the outgoing government", are trotted out as living proof nothing much in politics ever changes.

For the party faithful this blame game is proof the people they didn't like were evil-doers and the rest of the electorate roll their eyes and get on with life.

Rinse and repeat at the steady rate called an election cycle.

It would be pretty normal for some fiscal claw back after the lolly scramble we call an election year.

So long as there are no external economic shocks that bring to the fore the risks in higher spending and more debt.

No mention of the Labour, NZ First, Greens pre election spending promises of $35 Billion which will either be delivered with more taxes, more debt or not delivered and be just more broken promises (lies)

a) The voter clearly indicated they waned no more nor increases in taxation.
b) This leaves more debt to take on, but the Labour Govn has promised to reduce it.
c) Not delivered, well given a and b clearly a not delivered that will be a hammering as a failure

Hence Labour is little more than National lite II (and this includes all that's bad about National and there is a lot of it).

Meanwhile, National is a strong and dangerous opposition, if Labour wrong steps we'll be heading for an early election, not sure if that is a bad thing actually.

PS oh and for b the talk about PPP is clearly a way to get around b) ie smoke and mirrors on debt which loads up the future costs and taxation burden, have to hope National hammers labour on this and not keeps mum.

A broken promise isnt a lie, unless done knowing you have no intention of fulfilling it. Which is an interesting thought all by itself, ie has Labour knowingly lied to us to get into Govn? Omission is of course just as bad ie "lets not look too close because if we do we will obviously know we cant meet this"

As usual Matt Ridley nailed this very thing: an Excess of Good Intentions. And, just reading Hitchens' 'Arguably', there's the delicious thought (from Saul Bellow) in one of his articles of 'The Good Intentions Paving Company'.
Which fairly much describes the current Gubmint.....