Government books only $3.2 billion in the red, as New Zealanders spend more and require less support via the wage subsidy than expected

Government books only $3.2 billion in the red, as New Zealanders spend more and require less support via the wage subsidy than expected
Grant Robertson. Getty Images.

The Government’s books are in better shape than Treasury forecast in its September Pre-Election Economic and Fiscal Update (PREFU).

According to accounts for the three months to September 30, the Crown’s deficit was 50% smaller than expected. The operating balance before gains and losses (OBEGAL) came in at -$3.2 billion, as opposed to -$6.5 billion, as forecast in PREFU. 

This was owing to the Crown’s core tax revenue being $2.1 billion higher than forecast at $22.0 billion.

Stronger domestic spending saw GST revenue come in at $6.2 billion - $1.2 billion above forecast. Revenue from source deductions (income tax) was $9.3 billion - $0.6 billion above forecast - as salary and wage income for the period held up better-than-expected, helped by the extended wage subsidy.

On the other side of the ledger, core Crown expenses were $27.0 billion - $1.1 billion below forecast, mainly due to wage subsidy payments being $1.0 billion lower than forecast.

This meant net core Crown debt was $94.0 billion (30.5% of GDP), $3.6 billion less than forecast.

Finance Minister Grant Robertson said: “This compares to the average for advanced economies before COVID of about 80%. Debt servicing costs remain low and are forecast to stay that way.”

Meanwhile total borrowings were $27.8 billion below forecast at $154.5 billion, largely due to decreased bank settlement deposits held with the Reserve Bank.

Robertson said: “The Government’s decision that the best economic response to the COVID-19 pandemic was a strong health response has proved time and again to be the right one.

“There was no playbook for this health crisis, and we acted swiftly as the situation unfolded to support our businesses and workers. Those decisions helped us keep kiwis in jobs and mean we are now in a strong position to drive the economic recovery.”

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52 Comments

Doesn’t matter what way, +/- the scale of the forecast failure is magnificent, its a massive short term miss.

Crown’s deficit 50% smaller than expected. Well, I will take any piece of good news I can. Even if it is early times.

There is a hugely significant psychological component to spending. In the markets they refer to animal spirits and sentiments or whatever, but it's also impactful on a nationwide every day spending level. It is well known in warfare, that morale and troop sentiment can make or break a battle. If you have ever been a manager, you will know that morale can make or break a team and impacts productivity.

Trust in leadership, effective relationships and governance are essential for economies to function. If citizens feel safe, have faith in their governments, they are more likely to spend, to invest and to plan for future spending. In a pandemic, the argument can also be made, that anxiety, uncertainty and fear is introduced, influencing the economic psyche. I suspect that some (but by no means all) of the difference in economic conditions between countries where the citizens are more satisfied and trusting of their governments, and countries where there is civil unrest, division and inconsistent communication from their leaders is partly related to the psychological component. Behavioural economics.

I think we see this in the cash hoarding in NZ. People are still scared, so they have more cash under the mattress or highly liquid than they ordinarily would have. However, people are still spending, so potentially, it more just a safety buffer and people still have some optimism.

lol yes, well .. animal spirits .. term used by Keynes himself. A nice lens to use from time-to-time.

I think Rudolph's spirit is flying in - though .. Santa might have already shot his wad?

ONLY $3.2 BILLION is a relative term - right?
I know times have changed but at some point this money has to be paid back by somebody.

I don't predict ( not an economist ) but with this "good" news I guess negative interest rates are off the table. And if they are - will market sentiment change and only see upside for interest rates in the near future?
Watching the US 10 year suggests optimism or just a dead cat bounce as Trump makes life difficult for all?.

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National borrowed about $70 billion during their tenure. So yeah it's relatively small in comparison.

I hope they do increase interest rates again. We're blowing some truly fantastic bubbles.

Publicly declared Crown net debt issuance recorded by NZDM under National from 2008 to 2017 was ~$52.274 billion. That excludes undeclared off-balance sheet liabilities.

I know times have changed but at some point this money has to be paid back by somebody.

That has never stopped us pumping house prices and household debt.

The answer is likely the same: high volume immigration coming in future.

3.2 billion is less than the profit the 'big four' banks make from NZ each year.

Seeing as we're fine with them sucking ~5 billion out of the country annually, I don't know why you're getting so upset about 3.2 billion in response to a pandemic.

Plutocracy - If directed at my comment - I support what the government has done to protect us and the financial price we have paid. My observation is about the cavalier way we now refer to such big numbers.
Recently attending house auctions in Auckland and watching $2m - $3m - $4m houses sell in mere minutes and hardly a sweated brow. I just feel we are becoming blasé about such significant amounts of money.
Maybe having earned mine the hard way I am a little old fashioned and all the clichés such as - paying my way, and not throwing it around, and it doesn't grow on trees - applies to me.

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Good news, someone tell Jacinda we can afford dental for everyone after all!

(I'm serious, it's time to just do this bit)

And buy a lunch for all the poor kids

Could this mean that the government's September PREFU was deliberately forecasted low? Knowingly its real objective was to come out on top post election?

Treasury does the maths.

They "do the numbers" when it's good news. When it's not they get labelled as "kids".

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Well done Jacinda and Grant Robertson for a great response to the COVID crisis. Hopefully next on the agenda is sorting out house prices

A land tax would solve both the government deficit and land value issues simultaneously. And have the added effect of reducing rents and household debt. https://np.reddit.com/r/newzealand/comments/6b6qy5/landlords_threaten_re...

Although generally the plan with taxes like that is to keep government revenue broadly neutral, by offsetting any new tax with tax reductions elsewhere, which in NZ would be primarily aimed at income taxes.

So it wouldn't "solve" the government deficit.

A land tax could very well reduce low-quality spending in the long run.

The increased tax revenue could be offset with making the first 10-20k of an individual's income tax-free, which would in turn reduce the need to provide income supplements.

A targeted tax would free up more land for development purposes, increase social housing stock and save public spending on accommodation supplements and emergency housing.

How would it reduce rents?

That's good news. Given that, do we really need the 39% income tax rate that the truly wealthy won't pay?

Why do we even bother with taxation at all?
If the answer to all of our problems is just a figure on a spreadsheet, then does it matter what that figure is; be it $100 billion or a trillion or ten?

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Do not put strange ideas into Orr's mind, mate. He is already out of control. He is positively convinced that money grows on trees - actually, he probably thinks that you don't even need a tree to grow money...

The frightening thing is, he and his fellow central banking experts really believe that!

Yes you are right. It does seem that they do.

Total Crown borrowings as of 30 September 2020 : $154,556 million.
NZ Debt Management publicly disclosed Crown issued debt ~$129,000 million as of 30 September 2020.

How has the balance been raised and what is it funding?

As the Levy Economics Institute tells us here, the governments borrowing doesn't finance anything. http://www.levyinstitute.org/publications/can-taxes-and-bonds-finance-go...
The government is the currency issuer and as such its deficit spending becomes the private sectors surplus, it represents our savings held in the banking system as bank reserves.

Bingo. Tax is just cancelled money.

I thought they were potential deposits taken from one citizen and credited to another via government transfer payments.

The concept of taxation was that civilised societies gave 1/10th of everything they grew or made to the community to provide it with the means to feed, house and clothe the roadmakers; soldiers and doctors etc. In times of plenty, they stored away extra for when the inevitable tough times came ( a Surplus), and applied it then. If they ran short, they had to tighten their belts accordingly. There was no way to magically way create food from nothing, and when better times came they prepared again. (Option B was always to sack the village next door of course)
Pretty much the exact opposite to what we do today with one exception - We never store stuff away in the good times, as that might stop the good times from being so good!

Don't you mean Churches BW? Not communities. It's called a "Tithe", and not too long ago I heard a 'Christian' inform one of her parish members that if they didn't tithe then they were stealing from God. That really pissed me off!

But yes it has got somewhat out of control.

To be fair I was generalising. It's the best analogy I can come up with to try to explain The System to the family ( who long ago learned to glaze over and nod in agreement!)

It was the notorious conman, fraudster and crook Brian Tamaki who said it:
https://www.nzherald.co.nz/nz/destiny-church-demands-more-than-tithe-for...
Actually, in his so-called "Church", families are pressured to give "love offerings" and other cash donations above the expected 10 per cent tithe. A parasite preying on the weak and the gullible.

bw your general point is correct but some of your deets are not ;-)

The first "taxes" (that we have record of) were paid with labour, not currency and this was Egypt 5000 years ago. I think, if we look at the huge infrastructure building projects that we see across the fertile crescent thousands of years before that even, we can hypothesise that labour had been long established as something you gave for the greater good. So if we look at Gobeklie Tepe (at least 12000 years old) and the kind of community and generational labour commitment that would have required from human beings (that were still predominantly nomadic, hunter gatherers), then it might even be valid to suggest that sacrificing something of ourselves as individuals for some sense of civic duty, it part of what it means to be a homo sapien and has always been part of who we are. Certainly, when the first corvée was recorded (as forced labour in Egypt) there was also a religious foundation. The poor provided forced labour for the Pharoah because he performed the rites that ensured a good harvest, appeased the gods and ensured the overall wellbeing of the people (gotsta avoid those famines and plagues yo).

And later, when taxes were paid in harvest, it was a heckuva lot more than 1/10th, more like a 5th. But equally, without a Pharoah (or similar) to provide defensive walls and armies, you'd be f&%ked as a farmer, because horse mounted pasturalists would see you as a sitting duck and you would would be constantly raided by fighty dudes on horses. Later they were also fighty dudes in ships. Either way, the people that were still semi-nomadic, preyed on those who had become settled agriculturalists, so this necessitated centralised protection and taxes. The first currencies were to pay for armies and propelled the existence and use of state minted coinage. However, if you didn't live in an area with a centralised state authority, even in antiquity, then your "taxes" were just a commitment to fight for your liege overlord or tribal leader if asked to and it was a matter of honour and family reputation to not do so. Furthermore, if you were a citizen of a conquering empire then you might not pay any taxes either, because the conquered people paid taxes and the conquerors just enjoyed the economic boost. And hence why imperialism is almost as consistently popular and common as every other aspect of human civilisation.

Taxes have been very inconsistent over history! For vast periods of most nations, the only taxes were just that you went to war when asked, along with "gifting" various people.

Also, some countries still have citizens who store lots away (savings). One persons deficit always has to be someone else's surplus.

Alright Grant, on that good news hows about a little cash back for kiwi's just in time for xmas?
I promise to spend it.

The headline could just as accurately read, private sector surplus now only 3.2b in the black and the private sectors surplus was 50% smaller than expected.
As economist Wynne Godley explained with his accounting identity 'sectoral balances' all financial flows between the sectors of the economy must balance out, if one is a surplus or a deficit then the other two sectors must be of a matching and opposite value.
An explanation here. https://gimms.org.uk/fact-sheets/sectoral-balances/

How do the large distributions to foreign owners of NZ assets such as the banks effect this balance? Does it mean our Government borrowed to fund these distributions?

Ah. But what if Inflation doesn't arrive as planned?

Modern Monetary Theory (MMT) holds that central banks/states can print as much money as they want without any adverse effects. From this, it's a small step to sending every household a monthly stipend (Universal Basic Income--UBI) paid by freshly issued currency.
Given the unfairness of the income tax system, as the super-rich buy tax breaks, tax shelters and subsidies via lobbying and political contributions, it's just one more tiny step to eliminating income taxes entirely and printing all the money the state needs.
Why would this enrich the super-rich and impoverish the rest of us? Printing money in excess of the goods and services being generated is supposed to create inflation, which is a "tax" on all cash and wages, both of which have been losing ground for decades.

(CH Smith)

MMT does not say that the government can spend without limit but that the limit is the availability of unused productive resources within the economy that can be put to work. Banks create new money every time that they issue a new loan and this mostly goes into non productive house speculation.

Even Kelton's works admit that Taxation is not critical to MMT if inflation is not an issue. And it's not likely to be in my opinion.
(NB: Please don't misunderstand me. I'm not advocating the elimination of taxation at all - quite the reverse. But what's going on in the World of Monetary Policy today is fraught with disaster)

MMTers’ understanding of how the mechanics of government taxing and spending work, is that taxes and bonds do not and indeed cannot directly pay for spending. Instead, the government creates money whenever it spends....taxes are one tool governments can use to control inflation. They take money out of the economy, which keeps people from bidding up prices....the basic upshot of all this is that taxing less than the government spends, and issuing bonds in tandem, isn’t a problem under most prevailing circumstances, per MMT. The main constraint on government deficits is inflation, but at a time like now when inflation is low, that’s not a serious concern.

https://www.vox.com/future-perfect/2019/4/16/18251646/modern-monetary-th...

All spending can create inflation, the source of the money makes no difference in that respect. If money created by the governments own deficit spending is used by the private sector to repay its own household debt issued by the banks or to finance its own private savings then this will not be inflationary. Also as NZ runs current account deficits that must be financed, some money will also end up as foreign savings. (Sectoral Balances). https://gimms.org.uk/fact-sheets/sectoral-balances/

Money supply is waaaaay up. As is lending. However, my personal opinion (based on the research that I have done) is that inflation also requires a psychological aspect. You can increase the money supply, but if there is a recessionary or depressionary mindset prevailing, people will just hoard the extra cash under the mattress. Fear and greed sentiment are still hugely significant.

Sadly where the pork price goes our beef and mutton is sure to follow.

Maybe we should target a balanced current account and stop selling NZ to the highest bidder.

BW there is another issue that must be considered under the MMT discussion on Governments issuing currency and that is the value of that currency. Examples of rampant money printing like Uganda, Venezuela and Argentina show that the currency value will collapse if too much currency is issued. Besides we do have significant inflation in our economy today. Of note it is in just one part but impacts almost everything else - housing. So the Government's QE program has issued lots of extra money without giving it effective direction. Their early attempts to provide direction, GRs asking the banks to lend to business's which didn't happen, were pathetic and completely ineffective. So now the Government's refusal or inability to provide direction to issued currency, or to tax property speculation and rental housing is resulting in a dangerously imbalanced economy.

Inflation expectations remain subdued both short and long run because 1. QE doesn't print money, it creates inert bank reserves 2. the unemployment rate is once again being abused by the participation problem.

We've seen this all before - no inflation. Link

Nonetheless, one year NZ government TBills, at today's tender, priced at 13.5 bps compared to 5 bps last week.

Hang on a second what should be highlighted is the overall debt being 154 Billion not 3.5 Billion , keep those printing presses going boyz.

NZ RBNZ must steadfast, in absence of any govt. inclination towards austerity measures. The job is now to extract more profits from OZ banks, to give them little nudge that more to be done in the future for real NZ loan based productivity, rather than a sitting idle waiting the magical valuation up of dwelling cost. So as Mr. Orr stated early this year, they're not going to be knee jerk, so the same will be for this FLPs & negative OCR. Must do it, simply as the waves of lock down will still be imminent for now.

I think the myth of National being better economic managers has actually now been put to bed. Without this, what do they have left to campaign on?