IMF's fiscal forecasts make grim reading for NZ

Dr Bryce Wilkinson
NZ Herald
21 October, 2020

Fresh numbers show the Labour-led administration was a big spender even before Covid-19 and New Zealand incomes overall in 2025 might be less than in 2019.

Last week the International Monetary Fund (IMF) published its forecasts out to 2025. It shows New Zealand government spending rising from 35.8% of GDP in 2017 to 40.0% in 2019, the largest increase of all 39 so-called “advanced economies.”

Government spending has ballooned further in response to Covid-19. The IMF forecasts New Zealand will spend 46.7% of GDP this year and 44.5% in 2021. It forecasts that between 2017 and 2021 only Hong Kong will boost government spending relative to GDP more than New Zealand.

The IMF also forecasts that New Zealand’s real GDP per capita in 2025 will still be lower than in 2019. Only four “advanced economies” have the same dire outlook. By comparison, Japan hovers near the median with a 3.9% increase while Australia is projected to be up by 2.7%.

In 2019, 25 of the 39 IMF’s “advanced economies” had higher average incomes per capita than New Zealand. By 2025 it will be 32 countries. Hong Kong, South Korea, Taiwan and Singapore are now much more prosperous than New Zealand. Even the Irish now have more than twice New Zealand’s per capita income.

What does this mean for Kiwis? It will be harder to afford what other countries can. It also means that Kiwi’s standard of living depends greatly on the quality of government spending.

National disposable income is about 82% of GDP. When public spending exceeds 42% of GDP primary earners are only spending or saving directly one dollar for every two dollars they earn on average. The rest is being rechannelled by the state for better or worse. And don’t forget that regulations further dictate how Kiwis can spend their money.

What can be said about the quality of all that government spending?

Unfortunately, rigorous assessments of value for money in government spending are rare. What is not measured and is difficult is unlikely to be achieved. The Provincial Growth Fund was a particular disgrace but whimsical promises to plant a billion trees or build 100,000 houses without proper justification illustrate the genre.

After Covid-19, the discipline of funding current spending out of current revenue was abandoned. And last week’s election was full of promises to scatter borrowed money in all directions. On top of this, the Reserve Bank’s credit creation is funding deficit spending to an unnerving degree.

Of course, the Covid-related spending was not all bad. The epidemic needed a vigorous public health response and plenty of other countries are taking similar actions.

Independent projections by expert international organisations also provide a useful check on Treasury’s forecasts. Treasury’s income forecasts in 2025 are a bit more optimistic. It projects real GDP per capita in 2025 to be 3.3% higher than in 2019.

Yet the time profiles of both are different. The IMF sees a sharper Covid-19-related downturn and a quicker bounce back. But it also has a slower growth rate for incomes after about 2022. On the other hand, Treasury thinks New Zealand’s underlying income growth is a bit faster.

The IMF’s fiscal forecasts also put New Zealand’s forecasts for fiscal deficits and public debt into an international perspective.

The forecasts are sophisticated. Different countries can be at different points in the business cycles. For example, countries in recession will tend to have large fiscal deficits. The IMF’s fiscal deficit forecasts adjust for such differences.

Back in 2017, New Zealand had a fiscal surplus of 1.1% of GDP on the IMF’s measure. Only seven of the 36 countries had a larger fiscal surplus that year. But by 2019 the big-spending Labour-led government turned this surplus into a deficit of 2.4% of GDP.

Fast forward to the IMF’s fiscal projections for 2022.

Only two of the 36 countries are projected to have fiscal surpluses by that year: Germany and Greece. And five are projected to have bigger deficits than New Zealand’s 5.4% of GDP.

Between 2017 and 2022 none of the IMF’s advanced economies showed as big a deterioration in this measure of fiscal balance as New Zealand. As already mentioned only Mexico had a larger increase in government spending relative to GDP.

Large fiscal deficits increase the public debt. New Zealand also compares badly on this measure of fiscal largesse. Between 2017 and 2022 New Zealand’s gross and net public debt ratios to GDP will increase by more than in any other “advanced economy,” according to the IMF.

Keynesian economists might hope such fiscal largesse results in lower unemployment rates. Yet on the IMF’s projections, New Zealand’s rate of unemployment will merely track the slow decline in the “advanced economy” median rate from 7.0% in 2021 to 5.0% in 2025.

The fresh Labour Government has a clear majority and is now fully accountable for the quality of public spending. New Zealanders’ prosperity is at stake.

It is also important to think about its monetary policy directives. The Reserve Bank has been creating bank credit as if money is no longer a scarce resource. But to savage the return on low risk savings is to invite people to chase risk and unsustainably inflate property prices and the sharemarket.

The IMF’s projections to 2025 assume no international financial market collapse. That assumes the current pathology of injecting trillions of dollars of government money and central bank credit into economies is sustainable. There is no guarantee it will avert a wider collapse.

The re-elected Labour Government should hope for the best and plan for the worst. It can start by making sure to rigorously assess both spending and regulation – and publish those assessments.

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