How big is the fiscal deficit problem and how long will it take for our governments to turn it around?
Do not be fooled by rosy scenarios of painless correction. They typically rest on two assumptions: 1) an implausible degree of future spending constraint and 2) continuing positive national income growth to lift tax revenues.
Adopt those two assumptions and you have Treasury’s pre-election forecasts. Fiscal deficits turn into a minimal surplus in 2026-27.
But there is little joy even in this. The forecast surpluses remain modest, not exceeding even $1 billion in any year before 2034-35.
That means the public debt will still be high when the next unexpected economic shock occurs, be it higher global oil prices, an earthquake, a volcano or an epidemic.
Treasury forecasts that net Core Crown debt on the longest-standing measure will not drop below 40% of GDP until 2026-27 and will still be above 30% of GDP in 2027. That is bad. The Public Finance Act requires governments to restore debt to a prudent level after some event has passed that caused heavy borrowing. Before Covid-19, Treasury’s advice was that a prudent level, using this measure, would be no more than 20% of GDP.
I would expect it to advise the next incoming government that less than 20% of GDP on the same measure would be prudent. Public debt ratios in the US, EU and other countries are now much higher. The increases global financial risks.
The essence of the fiscal problem is this. Labour’s Fiscal Plan for the 2017 general election aimed to increase government spending in the five years to June 2022 by $11.7 billion. In the event, Covid arrived and increased it by $77 billion. (That represents over $38,000 of extra debt per household.)
But the more crippling fiscal problem is that Labour intends to continue to spend at the emergency-power level. That is the taxing problem.
When Labour took office in 2017, Treasury was forecasting core Crown operating spending for 2017-18 would be 28.6% of GDP, and falling because of large forecast fiscal surpluses.
Will the next incoming government continue the current “spend-up-big, borrow-and-hope” fiscal strategy or will it decisively move to achieve a more prudent level for the public debt?
National needs to make its position clear. Hopefully its pending fiscal plan will not merely tinker with the problem?