There was an odd little story over the 2025 Budget, hardly worth relating except that it tells something about budget politics. The original invitations to the lock-up, the meeting which gives a preview of the budget to the media so they can prepare for the release of what is a complicated set of documents. (Lock-up rules mean their reporting is embargoed until the budget is delivered in Parliament.) However, the usual invitation was not extended to analysts – economists often based in organisations such as the NZCTU and NZ Initiative – who have the skills to dissect the budget. There was an outcry and the government promptly backed down. The lock-up went ahead, much as it has done for forty-odd years.
Of course, a budget is a political document but it is founded on the Treasury’s independent account of the economy, Budget Economic and Fiscal Update (BEFU). They set it out without comment. The politicians try to frame perceptions.
Hence the minister’s description of the 2025 budget as being a ‘Growth Budget’. It is hard to draw that conclusion from Treasury’s economic forecasts. The economy seems to be in the recover phase of a standard cyclical recovery, but the economic track after is markedly below what it was before the current downturn – perhaps by 6%.
Distinguishing the upswing from the long-term trend is critical. Remember the distress of the Bolger Government when the strong upswing ended and the economy toddled along a low growth path? * (It was just before an election.)
Moreover, the Treasury projections do not see any catch up, and their projected labour productivity growth rate is about 1% p.a. which is below the long-run trend of 1.4% p.a.. (In every affluent economy I follow, everyone reports a lower productivity growth rate so the slowing may not be unique to New Zealand.)
Illustrating the difficulties of raising the growth rate, the minister highlighted the ‘Investment Boost’ policy, costing an average $1.6b year, which lifts the per capita GDP growth rate by .05% p.a. over the next five years (i.e. from 1.275% p.a. to 1.280% p.a.) and by a similar amount over the following 15 years. In two decades GDP is expected to be 1% higher because of the new policy.
In fact, there are signals that the economy will struggle with even that projected growth rate. Much has been made of the government’s measures to boost social, housing, social and transport infrastructure. Without adequate infrastructure, economic growth will stall.
The Treasury projects that its property, plant and equipment (excluding specialised military equipment and cultural and heritage assets) will increase 11.1% in real (that is, excluding price changes) terms between June 2025 and June 2029. Real GDP is expected to rise 11.2% so the public sector investment is barely keeping up with, rather than driving, growth.
Even so, to fund this investment the government has had to restrain public consumption to outraged responses from those sectors which have suffered.
This investment adds to the net worth of the government. The Coalition Government has stated an ambition to keep net worth’s level near 40% of annual GDP. In June 2025 it is expected to be at about 39.9%, down from 43.2% in June 2024 and 45.3% in June 2023. For a technical reason, Treasury does not really forecast the ratio for June 2029 but I estimate it to be about 35.5%, well below its target ambition. **
That means that the government is still borrowing to sustain public and private consumption. (Public consumption directly, private consumption insofar as the government can raise taxes to maintain its public consumption ambitions.)
As a result, the net-debt-to-annual-GDP ratio remains high. It is currently 42.7%, which is higher than at any time in the last decade. In 2029 it is expected to be 45.5% of annual GDP. Contrast that level with the target of 30% (but I remind you I would accept a higher rate, were the government funding infrastructure). It is also moving towards the 50% ‘ceiling’ where it is thought lenders would get concerned. As the Minister has stated, such high debt levels leave little leeway to borrow to ease us through the next large shock. ***
The commentariat focused on budget winners and losers – as they always do. Little attention was given to the underlying issue that despite the government’s cheerfulness it had little room to manoeuvre – that there had to be serious losers. By highlighting them the commentariat obscured the main economic issue – the poor underlying economic performance and that it was not improving.
This column reports a gloomier picture of the state of the economy than the Luxon Coalition Government is trying to sell. But it is based on the professional judgments of the Treasury economists and accountants. Their forecasts will be near the professional consensus; the Treasury is just more expert, informed and detailed. Even if the government’s 2025 budget sales pitch succeeds, it may find itself struggling with the 2026 one, a few months before the next general election.
* Not only the government. One editor complained that nobody warned him of the distinction between cyclical recovery and long-term economic growth. Ironically, a few years earlier he had banned from his newspaper the economists who were already giving that warning.
** The Treasury does not adjust its forecasts of its assets for price increases, but it does for GDP. I have assumed that the asset prices inflate as the same rate as GDP.
*** Treasury’s draft 2025 Long-term Insights Briefing reports that the 2010-1 Canterbury earthquakes had an identifiable fiscal impact of 11.3% of annual GDP. For the 2020-2 COVID-19 pandemic it was 20.4%. The briefing gives no estimate for the 1996 Wool Price shock, nor the 2008-9 GFC shock.
*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014.
9 Comments
(In every affluent economy I follow, everyone reports a lower productivity growth rate so the slowing may not be unique to New Zealand.)
If everything's chugging around at approx 1% growth, is that really growth, or a margin of error.
Thanks to non productive $100b lolly scramble that generated no forward momentum, we are now stuck with towing that debt. We have become the little engine that can't. Those working hard with low debt are probably doing ok. Those doing little that had got used to handout after handout on borrowed money are in for a reality check.
Current Govt's messaging is get out and start working.
It isn't borrowed money or tax payers money - the welfare state is funded as an operational cost and is met using fiscal operations via the reserve bank. You also need to remember that - whatever your moral judgement might be - that 'handout' will be spent in the private sector - at the supermarket and down the pub. So that 'handout' is helping to provide profits to NZ business and employment to NZ workers because it is a net positive for the private sector. Without it the economy would be weaker and business poorer.
You are suggesting taking cash from producers and giving to be consumed by those who are doing producing nothing is beneficial?
Sorta like covid handouts.
That makes no sense
We will go nowhere by 'investing' in the pub or the supermarkets.
Welfare payments are not an investment as such - they provide a minimum quality of life for NZers but they also act as an 'economic stabilizer' - to counter private sector business cycles - low unemployment to high unemployment etc.
If all the people who lost their jobs received no money during a recession then the recession would last much longer and cut much deeper. The unemployment benefit acts as a buffer or injection of liquidity into the private sector (from the public sector side of the economy) as the private sector is reducing its spending for whatever reason.
You can ask a similar question about the pension - what was it like for people who couldn't work any more due to old age when there was no state pension? What was the economic impact of that more broadly? And what was the financial cost for families that took on looking after elderly parents?
Picture the whole economy as all of the individual economic activities - public and private sector working together and benefiting each other. It's not a zero sum game in the real economy.
How do those who are producing and working hard get an income? How does the farmer sell his product? He sells it because other people in the economy have an income and can buy up his produce. The more people there are in the economy with income - the more produce and more revenue and profit the farmer will get from his hard work.
Which brings us circling back round to the lazy, useless unemployed - as long as have the income to buy those veges I don't think the farmer minds all that much where that income comes from.
If there is a demand for more labor from the labor market than unemployment goes down which suggest most people getting a 'handout' want to work and are trying to get work. If that wasn't true than unemployment would stay high even when the economy was doing well - but it doesn't.
That's an example of real-world economics - it's all there in the data. This is very different from 'talk radio' economics.
The 2024 Budget was considered fiscally neutral because cuts to government spending were offset by cuts to taxes. Whatever models NZ economists were using they were very optimistic in their forecasts by a considerable margin by the end of last year. GDP came in much lower than expected because economists ignored the real-world economic impact of cuts to government spending.
The impact of spending by the government has a much higher multiplier than an equivalent uptick in multiple small consumption activities by individual tax payers.
There is also a big misunderstanding about how governments spend. The government does not use tax revenue or bonds to fund operational or investment activities in the same way that entities in the private sector would do this.
The government creates new money and adds it to the money supply when it spends and it taxes and accepts deposits (bonds) after this new money is circulating in the economy.
The reason that government bonds are deposits and not loans is that when they are settled - the value of the bond is returned into circulation - the holder of the bond gets the money that they deposited returned to them.
But when the principle on a commercial bank loan is repaid that money is removed from circulation - it is destroyed. A commercial bank cannot re-use the repayments on loan principle.
Governments do not borrow from commercial banks they have their own reserve bank and in effect have a limitless overdraft with that bank from which spending is made in the first instance.
Taxes and bonds are inflation tools used to withdraw money from circulation after it has been created and is still in circulation.
What this all means is that the impact of government spending is very different to the impact of private sector spending and this is why tax cuts do not typically generate economic growth.
This might explain why the 20% depreciation bonus is predicted to deliver a 1% improvement to GDP in 10 years - so 0.1% to GPD on a yearly basis. Probably not even statistically significant.
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