Economic growth slows, forcing Government to spend big
Wednesday, 11 December 2019
Economic growth is slowing as international economic uncertainty begins to bite, according to Treasury's latest forecasts.
The gloomy figures have forced Grant Robertson to get out the cheque book, announcing a $12b programme of infrastructure spending designed to stimulate the economy.
Treasury predicts the stimulus will see economic growth return to more solid numbers by 2021.
The new figures were announced at Treasury's Half-Yearly Economic and Fiscal Update (HYEFU), where it sets out it's latest forecasts. The last forecasts were delivered at the Budget Economic and Fiscal Update (BEFU) in May.
**READ MORE:
* Government debt changes are more important than just a number
* Adrian Orr not letting Grant Robertson off the hook
* Massive $7.5 billion surplus shows room for tax cuts and spending
* Robertson defends forecasts, as economists warn of a return to deficit**
At the May budget, Treasury was expecting the economy to grow by 3 per cent in 2020 and 2.8 per cent in 2021. It's now revised down it's forecast for 2020 to 2.2 per cent.
As a rough guide, 1 per cent of the economy is $3b.
By 2021, the growth is back to 2.8 per cent, followed by 2.7 per cent in 2022, and 2.5 per cent in 2023.
The slowing economy has big implications for the Government's books. Next year, there will be a primary account deficit of $900 million, down from a $1.3b surplus forecast at the budget. There will, however, be a $12b surplus over the forecast period up to 2024.
Unemployment is also expected to tick up next year. At the budget, Treasury forecast an unemployment rate of 4 per cent next year, but it's now expected to be 4.3 per cent, and will stay between 4.2 and 4.3 per cent unitl 2024.
Wages are expected to increase by 3 per cent in 2020, rising to 3.3 per cent the next year, and hitting 3.7 per cent growth by 2024.
Robertson has finally heeded calls from major economists and Reserve Bank Governor Adrian Orr to spend more to stimulate the economy, buttressing New Zealand from international headwinds.
He's announced a $12b programme of additional investment, including $6.8b for new transport projects, mainly to be spent on new road and rail projects. That investment will see Government debt increase to $76b by 2022, up from $69.8b which had been forecast at the budget.
That means the Government will break one of it's Budget Responsibility Rules, albeit just slightly: net core crown debt will hit 21.5 per cent of GDP in 2022, just north of the Government's rule, which was to get net core crown debt below 20 per cent in 2022.
Robertson said he is taking advantage of extremely low borrowing costs. Government borrowing rates are expected to hover at just above 1 per cent over the next five years, less than half what they were when the Government took office, and well below long-run averages.
Robertson had said these rules would be replaced with a new debt window, which should see net core crown debt stay between 15 and 25 per cent after 2022. Today's announcement means that window has now been brought forward.
The policy changes today means that Treasury's fiscal impulse indicator now shows the Government's spending is making a net-positive contribution to the economy.
The fiscal impulse looks at the money the Government takes from taxation and how much it invests back into the economy to see whether it's making a net positive or net negative contribution to demand in the economy. The fiscal impulse is now 0.9 per cent in 2019/20 and 0.3 per cent in 2020/21, up from 0 per cent and -0.2 per cent in the budget forecasts.
The government's contribution to demand is likely to be even greater, as the fiscal impulse only looks at second-round economic effects. That means it looks at the demand created by the Government hiring workers to build something, for example, but it doesn't look at what happens when those workers then spend their wages paid by the Government.
There's always some uncertainty around long-term forecasting. Treasury currently believe net migratoin will decline rom 50,000 this year, tracking down to 35,000 in 2024. Treasury has been forecasting slowing migration for some time, as it believs that migration will re turn to its long-run average.
This has failed to materialise, leading many economists to question Treasury's continued assumption that migration will shrink.
Treasury has a second set of forecasts, which look at a scenario where mgiration stays high. This would see economic growth saying high. In 2021 growth would be 3.2 per cent, and 2.9 per cent in 2022.