The Government’s fiscal firepower might not create the boom the Finance Minister and the Reserve Bank are hoping for, according to BNZ Head of Research Stephen Toplis.
He also says the Government is unlikely to be able to stick to its commitment of getting debt to below 20% of Gross Domestic Product (GDP).
The Reserve Bank’s August Monetary Policy Statement (MPS) said the Government’s fiscal stimulus package will be one of the biggest contributors to GDP growth over the coming years.
The main part of that package is the Families Package, a policy which will leave households with an income of up to $55,000 a year $129 a week better off.
But speaking to Interest.co.nz, Toplis says some of the impacts of the fiscal stimulus package will be offset by different economic issues.
“The classic example of that is petrol prices; we’re seeing a substantial increase and people cannot afford those increases, so it’s eroding the gains.”
In other words, some of the gains those receiving the benefit of the Families Package would have received through the policy will be offset by other rising costs in the economy.
At the same time, Toplis says New Zealand’s economic growth won’t be as rosy as the Government or the Reserve Bank have forecast.
“We’re seeing migration fall away relatively aggressively and that’s slowing down the impetus from population growth,” he says.
As well as this, commodity prices have come off their peak, tourism growth is beginning to abate and the housing market is “basically stuck in the mud.”
This, along with the lesser impact of the fiscal stimulus, will drag on economic growth.
“In the first instance we know economic growth is going to be below what Treasury expected,” Toplis says.
Earlier this month, Treasury warned that “growth over the coming fiscal year may be weaker-than-forecast in the Budget.”
The next day, Finance Minister Grant Robertson admitted that Treasury would likely have to downgrade its economic forecasts “a little bit” later this year.
“[The Reserve Bank] assumes the big fiscal stimulus we have seen, accompanied by relatively low-interest rates, would drive quite a big economic expansion next year.
“We’re just not quite as convinced that will happen.”
20% Core Crown net debt target ‘red herring’
Meanwhile, Toplis is not convinced the Government’s fiscal targets – such as getting Core Crown Debt down to 20% of GDP – will be met.
One of the main reasons for this is because of the lower GDP growth story – “softer growth, softer revenue.”
Essentially, if the economy is not growing as fast as the Government had expected, its tax take will be lower.
At the same time, Toplis is expecting the Government to come under a lot of pressure to increase its spending.
“If everyone is coming with their hands out saying, ‘we want more’ it’s going to be very, very difficult for the Government to completely resist that – particularly as we get closer and closer to another election cycle.”
This has already started to happen, with nurses and teacher strikes across the country.
But would it be that bad if the Government was not able to meet its debt targets?
“Frankly, none of it matters,” Toplis says.
“We talk about this 20% as if it’s sacrosanct. I don’t know of any economic research anywhere that says that 20% is the magical number that you should go for.”
In fact, both Moody’s and S&P have said it would not affect New Zealand’s credit rating if net core Crown debt was increased a few percentage points.
“The main reason for that is to show they’re being fiscally responsible. The number itself doesn’t matter – it’s a red herring.”
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