By Bernard Hickey
The government has forecast a return to budget surplus by 2014/15 and the creation of 170,000 jobs. It has forecast economic growth will rise to 4%, helping to control the government's borrowing.
Here's 5 reasons why those forecasts are not believable and why the government will need to cut spending harder and raise taxes in either 2012 or 2013 to fix its structural deficit.
The de-leveraging drag
New Zealand households and businesses have changed their approach to spending and debt. They are avoiding borrowing and repaying debt at every opportunity. This is suppressing any economic rebound from the Global Financial Crisis. Some analysis suggests this de-leveraging drag could lower economic growth by between 1% and 2% of GDP for up to a decade after the 2008 crisis. This is not reflected in the Treasury's forecasts.
Household debt to disposable remains only marginally below its record highs of almost 160% and a drop back to the 100% levels seen in the early 2000s would suppress spending in the domestic economy, the retail sector and in construction.
Banking the payments
The government has argued that NZ$15 billion worth of reinsurance payments, spending during the Rugby World Cup and the commodity price boom windfall for farmers will boost economic growth.
However, there are already signs that home owners, businesses and farmers are choosing to put their insurance payments and Fonterra payouts into the bank to repay debt, rather than rebuild immediately or spend money on consumption.
Banks executives have become noticeably nervous in recent weeks about a lack of net lending growth as households stubbornly refuse to take on extra risk when they know interest rates are unlikely to drop any further and house prices are flat to falling in most parts of New Zealand except for central Auckland.
Slow earthquake rebuild
The government is assuming more than NZ$20 billion worth of earthquake rebuilding will surge through the economy over the next three to five years. But there remain real doubts about how quickly the land stability issue can be finalised and whether the Christchurch CBD will be rebuilt to anything like its previous capacity.
The rebuild after the September 4 earthquake was surprisingly slow and the enormity of the planning and coordination task after the February 22 quake continues to confound many.
Global growth fears
Treasury's forecasts are dependent on continued strong growth in China and recoveries in both America and Europe, However, there are fresh doubts about China's ability to control an inflationary surge and the European Sovereign Debt Crisis continues to bubble along. America has also failed to bounce out of its recession with any vigour.
The slide seen in commodity prices in recent weeks is one symptom of those doubts. Dairy powder prices have already fallen 12% from their peaks in March.
IRD forecast much less
The Inland Revenue Department forecast revenues would be NZ$4 billion lower than the revenues forecast by Treasury over the next five years. The IRD saw lower corporate tax revenues in later years, yet the government chose to use the rosier Treasury forecasts.
The risks are that economic growth and therefore tax revenues will be less than expected, leaving the budget mired in deficits and the government borrowing heavily from foreign creditors, including the People's Bank of China.
This is not the balanced, cautious approach promoted by John Key and Bill English. They may find themselves redoing the numbers soon after the November 26 election.
23 Comments
Any and all government economic budgets should be based on the “worst case scenario”. There should be three scenarios Best-case, Nominal, and Worse case presented to the government from an outside body or within treasury that doesn’t have to answer to Parliament. The government must then coordinate the budget around the worst case scenario. In the lean years the budget would be more accurate and in the “boom” years the surplus can be reinvested into disaster accounts. The one thing most politicians cannot seem to comprehend is that large scale disasters happen more often than people WANT to admit.
Better disaster management.
First we need to admit that black swan events happen more often the stats would have us believe. Most large scale disasters are caused by at least five seemingly unrelated events that have to happen in a particular order to cause the underlying disaster. The odds of these events happening in the precise order are so astronomical high that even if most people could force themselves to see it happening and plan accordingly, they would be classify them as too remote to even occur. This is how statistics fails us because there events do happen even more often than we would like to think. What are the odds of two major earthquakes hitting a major metropolitan area within 6 months? A year ago it would have been unheard of but today it’s now “possible”.
Within the anatomy of a large scale disaster, looking closer at the 5 events you will notice three of them are technology related (usually one is a fail-safe that failed) and the other 2 are human decisions. The human decisions are general the incorrect ones often going against standard operating procedure and training. This doesn’t mean that the human element is always to blame but it does show that within most complex systems that involve humane intervention, that daily systemic procedures that inevitably arise (i.e. the daily grind) will trump SOP and training thereby allowing the events to proceed past the humane intervention phase. (i.e. “she’ll be right”)
"There should be three scenarios Best-case, Nominal, and Worse case presented to the government from an outside body or within treasury that doesn’t have to answer to Parliament."
Actually Treasury does this....at the end of 2008 Treasury projected three outcomes from the GFC and personally at least I commented that even their worst case scenrio was too optimistic, that was proved right....JK etc was wrong.
Last year JK I think is on record for saying with teh OCR where it was we should be seeing growth at 6% and not at 0% and he didnt understand why not......yet around 0% is what we have....so he's wrong again.
and its where I expect it to stay for the foreseeable future ie 2 to 3 years unless we plunge back into recession or worse a depression....which is -10%.....so +4% is a bad joke....
Interesting that IRD are again looking more realistic....they have done a better job in forecasting tax receipts in the last 5 years than Treasury....
So why do we even need Treasury? want to save a few million? really easy....sack 10% of Treasury, their data is so wrong we are better off without it tahn relying on it.
Personally I think JK and BE are lying to us to get re-elected, and I agree with BH on a massive budget re-org shortly after the [re-]election to correct for "un-foreseen" circumstances....they should try taking off their blinkers, they look like a pair of mine ponies IMHO.
regards
So what you are saying Bernard is that Treasury are producing projections based on what the politicians want to hear ( what's new?). So therfore, a good way to reduce costs would be to close down the Treasury as what they produce is not worth the pixels they are put on.
/ sarc off
It was a non budget designed to lull the electorate into a false sense of security to get past the line in November. Then when things are still looking dire, if Act is in the house on the right, National will be able to implement a more realistic fiscal plan. If by some miracle Labour and its motley crew of nanny state socialist supporters get in, we are doomed to financial oblivion. Anyone with any skills or wealth would be advised to pack up and leave in that event.
Good article Bernard. I would also add;
- Govt expenditure at $85 billion is totally out of proportion to our GDP $179billion. Govt needs to reduce expenditure back to 2005 levels and beyond if we are ever going to start growing again. If you ignore GDP as a measure (since it is totally rediculous) and look at our total export earnings ($52.4 billion), the Govt spends 160% of our earnings.
International tourist expenditure in 2010 ($9.54 billion) represents 18.2% of the total export earnings ($52.4 billion). Tourism is New Zealand’s largest export earner, followed by dairy ($8.97 billion or 17.1% of exports) in 2010.
- Governments don't create jobs. That they state that they will create 170000 jobs is laughable. Govt job creation is a myth.
Increased sales creates jobs (go ask any employer what would make them hire and additional worker - they will say more sales). Increases sales is another way of saying increased spending.
So yes, increased net government spending will indirectly create jobs within the private sector.
..increased net government spending will indirectly create jobs within the private sector.
OK, I'll bite (although I'll probably regret it later) .. I'm trying to follow you logic here, so please go ahead and explain where the govt gets the additional money to increase spending, and how this then creates 170000 jobs??
This is great news.... because we don't want a budget surplus.
Budget surpluses are the primary reason why the New Zealand economy has terribly underperformed over the last 20 years. Budget deficits, in New Zealand's case (because we have a trade deficit) are ALWAYS appropriate.
Government deficits = non government surpluses and
Government surpluses = non government deficits.
This accounting identity cannot be denied.
Therefore if the government were to run a budget surplus (like they did for about 15 years from 1994), non government savings would fall by exactly the amount of the surplus.
In other words, government surplus destroy private savings (ever wondered why NZ has the one of the worst private savings records in the world? 15 years of government surpluses and trade deficits is your answer), whilst government deficits increase private savings.
Either way, the governments hope for a surplus is misguided, and it won't happen. When the government reduces its spending in order to try reduce the deficit, economic activity and employment will decline. The automatic stabilizers will then get us back to an appropriate sized deficit.
Looks like Interest has managed to attract an adherent of MMT (Modern Monetary Theory). I won't go into a detailed refutation of the ridiculous concept that it is impossible for the private sector to save absent government deficits (read Robert Murphy's article "The upside-down world of MMT" on Mises.org for a thorough debunking), but here's some food for thought.
If we just change the word "government" to "Bernard Hickey" and try the same exercise, this is the result we get:
Bernard Hickey deficits = non Bernard Hickey surpluses and
Bernard Hickey surpluses = non Bernard Hickey deficits.
This accounting identity cannot be denied.
Therefore if Bernard Hickey were to run a budget surplus (like he did for about 15 years from 1994), non Bernard Hickey savings would fall by exactly the amount of the surplus.
In other words, Bernard Hickey surplus destroy private savings (ever wondered why NZ has the one of the worst private savings records in the world? 15 years of Bernard Hickey surpluses and trade deficits is your answer), whilst Bernard Hickey deficits increase private savings.
In terms of pure accounting, this is just as true as what was actually written. The question is, does this actually matter that the non-Bernard Hickey economy is technically in "deficit"?
Ah ha... well done for making the link with MMT!
You should know that I have already read the "Upside down world of MMT" article, the first part of which actually supports MMT (though the author doesn't realize it).
As one very savy commentator said regarding the 'saving coconuts' example, "Robinson can increase its net saving in coconuts only because the monopoly supplier of coconuts (coconut tress) increase their deficit spending of coconuts. He is actually showing that the deficit spending of coconut trees is determined by Robinson’s desire to net save coconuts. But he didn’t realize it".
Another commentator, "Well, for 25 days in a row, Kate gathers her ten coconuts per day to feed her family as usual, but the family only eats eight of them. This allows her to accumulate a stockpile of 50 coconuts, which can serve as a ten-day buffer (on half-rations) should the family become sick or injured. Kate is saving. But this saving has nothing to do with GDP or national income and product accounts that are used to measure economic activity."
http://pragcap.com/the-austrians-are-intrigued
http://pragcap.com/final-thoughts-on-the-austrian-school
http://www.creditwritedowns.com/2011/05/more-on-the-upside-down-world-o…
FYI from ANZ economists:
Some pretty rosy fiscal numbers including a projected return to surplus by 2014/15, with 4 percent GDP growth in the coming year and 3 percent per year beyond that for the following five years.
We agree with the short-term boost but struggle to believe this growth rate will endure given deleveraging and transitional headwinds for the economy. Y
es, we all know the boost from Christchurch is massive, but we simply don’t believe the economy has the supply-side capacity to keep expanding at 3 percent per year.
And on the demand side, debt run-ups in the scale we’ve seen tend to be followed by up to a decade of lower trend growth. The piper’s bill isn’t paid yet.
Alex - good comments from the ANZ the best of the bank economists
So what happens when the forecasts are not reached? What happens when unemployment is 0.7-1% above forecasts, and when wages only grow at 2.5% per annum on average? (rather than the laughable 4% suggestion)
yep thats right, more expenditure than forecast (more dole to dish out) and less revenue than forecast (less income tax and less GST revenue)
I guess it's fun to theorize and throw models back and forth at one another, the one refuting the others practicability. It's what we went to school for, it's proof of how well read we are and how incredibly honed our economic prowess is. So let's do that, let's talk ourselves into a spin... there's only one thing I do know for certain, when the cows do come home, most everyone will be wrong and the few who will claim to have known it all will be right by default only. Because there is no being right in this game.
your analysis has merit but like the Treasury advice ignores or discounts the impact of rising oil prices causing lower GDP, and higher inflation and unemployment.
Unlike a UK government report obtained by The Times which projects a drop in UK GDP of 1.7% for 2 consecutive years compared to baseline assumptions, higher inflation and unemployment if oil prices rise by 102% (already 50% above Oct 2010 levels)
more here
ACT put out a really good schedule last election, of the amount of growth that each one of a long list of government policies were costing our economy. I see no reason to doubt their case, and I see very little actual change having occurred to those policies. I think it is worse than wishful thinking, to expect a return to 3%, 4% growth, whatever, without changing the policies that reduced it in the first place.
Don Brash and his colleagues are also right. NZ is descending into "Chavismo", preferring the politics of ignorance to the politics of reality.
Owen McShane is another guy who is right, local body regulations are strangling the whole national economy. This is probably the single biggest contributor to the stagnation we are now trapped in.
True colours now,
"to expect a return to 3%, 4% growth, whatever, without changing the policies that reduced it in the first place".
Bollocky things. It was that very percentage growth that killed itself.
Only a flat earther could not understand that. Maybe we should run a survey on Act supporters, see if they think the world is flat (the only confuguration offering unlimited possibilities). Wouldn't take long.
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