No grounds for complacency

Dr Bryce Wilkinson
Insights Newsletter
18 September, 2020

We should thank Ruth Richardson for requiring Treasury to publish pre-election economic and fiscal forecasts. Compliments also to Treasury for maintaining their quality over nearly three decades.

The central projections released this week present the fiscal situation as challenging but manageable. Sure, core Crown government spending is expected to hit 39% of GDP in 2020/21, an eyewatering $60,000 per household. But by 2024/25, it will be down to 31%. The fiscal deficit would be tamed and the public debt ratio to GDP will have peaked. All this without new measures to reduce spending or increase taxes.

A day after the Treasury’s forecast, Statistics New Zealand published its June quarter results. A ‘lock-down’ fall in real GDP of “only” 12.2% looks pretty good against Treasury’s forecast 16% decline. But the difference is minor from a fiscal strategy perspective.

The Treasury’s projections always assume the incumbent government’s policies will continue. That rules out major new spending initiatives. As a result, projected core Crown spending per capita in 2020 dollars in 2029/30 is no higher than in 2019/20. That is unlikely. Pressure to increase future spending is inexorable. Projected spending in 2029/30 is already $15 billion (12%) higher now than in the pre-election estimate in 2017.

Treasury also assumes income growth will exceed the interest paid on government debt to 2034. In 2014/15 the interest on public debt was 1.9% of GDP. That was when gross sovereign issued debt was 38% of GDP. In 2029/30 Treasury’s projected interest cost will still be just 1.9% of GDP, despite the debt being 68% of GDP by then.

Long-term projections for income growth depend greatly on labour productivity. Treasury assumes by 2033/34 labour productivity will be 18% higher than last year. That represents an average annual compound growth rate of 1.1% pa. How do they expect this to happen? After all, in the six years to 2018/19, the average growth rate was only 0.1% pa.

Treasury’s central forecasts to 2034 also assume no major financial meltdown and no further big hits from mother nature. The next Government’s fiscal strategy should not be so sanguine.

Tough times lie ahead, tougher than readers might think by looking at central forecasts alone.

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