There is not a great deal of difference in Treasury’s projected GDP growth patterns between the May 2023 Budget Economic and Fiscal Update (BEFU) and the December 2023 Half Yearly Economic and Fiscal Update (HYEFU). But there are some other important underlying changes which suggest the incoming government has a tougher task than it expected. (I am skipping the September 2023 pre-election update because there is a lot of noise in the series, and the longer perspective gives a clearer account of any changes.)
Surprisingly, for me at least, the more recent HYEFU forecast suggests a slight improvement in the external account compared to the forecast six months earlier. But any difference is well within the forecasting fans, which indicate the inevitable uncertainties. (A footnote below describes how the Treasury may want to change its forecasts in the light of new developments since HYEFU was locked up in November 2023.)
The big difference between the two forecasts is population growth arising from higher immigration than was expected in BEFU. Since the GDP projection has not changed much, that means GDP (output) per capita is lower in HYEFU than BEFU.
This column treats population growth from migration in the standard way where the distributional impact of the new arrivals is neutral. The assumption is probably wrong and I plan to investigate whether the effect is significant. I’ll let you know (if anyone does the job before me, I am happy to report their work first).
As a result of the population growth, private consumption spending per person is falling over the next few years. HYEFU thinks spending will be rising again from 2025/6 but even in 2027/8 the per capita level will be below this year’s level.
You may think the changes are small, but averages can be misleading. Some will get an income boost, so many of those suffering will experience a greater fall than average. Losers include those facing higher interest rates; on the other hand depositors will be benefiting from the higher rates. Probably well over half the population will experience a fall in their spending power over the next two years.
The HYEFU forecasts are based on government policy decisions made up to November 24,before the new coalition government was sworn in. It reflects the outgoing Labour Government’s policies and did not incorporated the new government’s December Mini Budget decisions. HYEFU comments that they ‘will improve the fiscal outlook’, although the announced changes were small. The Mini Budget included neither the coalition government’s proposed income tax changes nor the offsetting cuts to public consumption. HYEFU says – perhaps piously – that the ‘other signalled commitments ... expected to be agreed in the future ... would be broadly neutral over the forecast period’.
The centre of those commitments is to give income tax relief, in order to allow some increase in private consumption after June 2024. (We shall have to wait to see how well the relief is are targeted on those most suffering.)
As HYEFU implies, the relief is to be offset by cuts to public expenditure. The Minister of Finance, Nicola Willis, has announced that the cuts will be in the order of 6.5 percent and more, but I am not sure of what. (‘Backrooms’ are a nebulous concept.)
My reaction was to recall the 3 percent cutting exercise on 1982 under Muldoon. (Willis had just been born; I doubt many in the cabinet will remember them.) I checked my memory with some on the frontline at the time. One described the outcome as a ‘sham’, with few real cuts.
Admittedly, Ruth Richardson slashed government spending in 1991's ‘mother of all budgets’ but that was as much about ‘redesigning of the welfare state’ from a European to a minimalist American approach. As well as impoverishing many New Zealanders, the cuts to the health system killed people while they waited for treatment.
Perhaps a more relevant instance was the measures the Key-English National Government imposed after the 2008 Global Financial Crisis. They were more a squeezing in which each year government departments were given a little less than they needed. Consequently, government borrowing remained high, coming down only slowly. The public agencies struggled with the under-funding. Part of the increase in government spending under the Ardern-Hipkins-Robertson Government was restoring what had been squeezed. (On the other hand, some of their additional spending seemed to me to be wasteful or ineffective.)
To my surprise – remember it was about Labour’s spending plans – HYEFU forecast a fall in per capita public spending of around 6 percent over the next three years to June 2026. Where Labour expected to get the reductions is unclear. Labour’s already assumed planned squeeze suggests that the Coalition Government is going to be struggling to get the cuts they need unless they have a dramatic (and, thus far, secret) agenda in the way that Richardson had.
We won’t fully know until the May 2024 budget brings the coalition government’s decisions together, although there will be various indications – cries of pain – before then. I have no doubt that Treasury officials will be struggling to meet their political masters’ demands. The real decisions are yet to be taken which is why the December Mini-budget was vague.
Being a member of the Opposition or commentariat is a bit like being a couch fan watching a football match, shouting advice like ‘you should run faster’. Now Luxon, Willis and a gaggle of associate Treasury ministers are on the field. Welcome to the real game.
Footnote: HYEFU observes the following new information since the November forecasts were made: the September 2023 quarterly GDP figure turned out lower than expected (it may be revised), indications are that the December 2023 CPI increase (to be released on 24 January) may be lower than forecast and that house prices rises are also more subdued, while the net migration inflow is higher. My impression is that international thinking about the world economy is becoming gloomier. We await more data and the 2024 BEFU to find out how that will affect the Treasury forecasts.
Brian Easton is an economist and historian from New Zealand. He was the economics columnist for the New Zealand Listener magazine for 37 years. This article was first published HERE
The big difference between the two forecasts is population growth arising from higher immigration than was expected in BEFU. Since the GDP projection has not changed much, that means GDP (output) per capita is lower in HYEFU than BEFU.
This column treats population growth from migration in the standard way where the distributional impact of the new arrivals is neutral. The assumption is probably wrong and I plan to investigate whether the effect is significant. I’ll let you know (if anyone does the job before me, I am happy to report their work first).
As a result of the population growth, private consumption spending per person is falling over the next few years. HYEFU thinks spending will be rising again from 2025/6 but even in 2027/8 the per capita level will be below this year’s level.
You may think the changes are small, but averages can be misleading. Some will get an income boost, so many of those suffering will experience a greater fall than average. Losers include those facing higher interest rates; on the other hand depositors will be benefiting from the higher rates. Probably well over half the population will experience a fall in their spending power over the next two years.
The HYEFU forecasts are based on government policy decisions made up to November 24,before the new coalition government was sworn in. It reflects the outgoing Labour Government’s policies and did not incorporated the new government’s December Mini Budget decisions. HYEFU comments that they ‘will improve the fiscal outlook’, although the announced changes were small. The Mini Budget included neither the coalition government’s proposed income tax changes nor the offsetting cuts to public consumption. HYEFU says – perhaps piously – that the ‘other signalled commitments ... expected to be agreed in the future ... would be broadly neutral over the forecast period’.
The centre of those commitments is to give income tax relief, in order to allow some increase in private consumption after June 2024. (We shall have to wait to see how well the relief is are targeted on those most suffering.)
As HYEFU implies, the relief is to be offset by cuts to public expenditure. The Minister of Finance, Nicola Willis, has announced that the cuts will be in the order of 6.5 percent and more, but I am not sure of what. (‘Backrooms’ are a nebulous concept.)
My reaction was to recall the 3 percent cutting exercise on 1982 under Muldoon. (Willis had just been born; I doubt many in the cabinet will remember them.) I checked my memory with some on the frontline at the time. One described the outcome as a ‘sham’, with few real cuts.
Admittedly, Ruth Richardson slashed government spending in 1991's ‘mother of all budgets’ but that was as much about ‘redesigning of the welfare state’ from a European to a minimalist American approach. As well as impoverishing many New Zealanders, the cuts to the health system killed people while they waited for treatment.
Perhaps a more relevant instance was the measures the Key-English National Government imposed after the 2008 Global Financial Crisis. They were more a squeezing in which each year government departments were given a little less than they needed. Consequently, government borrowing remained high, coming down only slowly. The public agencies struggled with the under-funding. Part of the increase in government spending under the Ardern-Hipkins-Robertson Government was restoring what had been squeezed. (On the other hand, some of their additional spending seemed to me to be wasteful or ineffective.)
To my surprise – remember it was about Labour’s spending plans – HYEFU forecast a fall in per capita public spending of around 6 percent over the next three years to June 2026. Where Labour expected to get the reductions is unclear. Labour’s already assumed planned squeeze suggests that the Coalition Government is going to be struggling to get the cuts they need unless they have a dramatic (and, thus far, secret) agenda in the way that Richardson had.
We won’t fully know until the May 2024 budget brings the coalition government’s decisions together, although there will be various indications – cries of pain – before then. I have no doubt that Treasury officials will be struggling to meet their political masters’ demands. The real decisions are yet to be taken which is why the December Mini-budget was vague.
Being a member of the Opposition or commentariat is a bit like being a couch fan watching a football match, shouting advice like ‘you should run faster’. Now Luxon, Willis and a gaggle of associate Treasury ministers are on the field. Welcome to the real game.
Footnote: HYEFU observes the following new information since the November forecasts were made: the September 2023 quarterly GDP figure turned out lower than expected (it may be revised), indications are that the December 2023 CPI increase (to be released on 24 January) may be lower than forecast and that house prices rises are also more subdued, while the net migration inflow is higher. My impression is that international thinking about the world economy is becoming gloomier. We await more data and the 2024 BEFU to find out how that will affect the Treasury forecasts.
Brian Easton is an economist and historian from New Zealand. He was the economics columnist for the New Zealand Listener magazine for 37 years. This article was first published HERE
1 comment:
Who else is enjoying the government created 'stealth tax' otherwise known as inflation? Do you believe their CPI number otherwise known as the CP lie?
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