Vanishing $2.1b surplus: Budget forecasts sure to set more sombre tone
Tuesday, 10 May 2022
Finance Minister Grant Robertson has already foreshadowed that economic forecasts released in next week's Budget will be less rosy than those the Treasury published in December.
But BNZ research head Stephen Toplis says it not yet clear “what we have lost and why”, or whether the Government may just be looking at a small miss.
The Treasury forecast in its December Half Year Economic and Fiscal Update (HYEFU) that the Government’s accounts would move back into the black in the year to June 2024, when the Treasury was predicting a $2.1 billion surplus.
Robertson admitted last week that the new forecasts – which will already have been drafted but just yet not yet made public – would not see a return to surplus until the following year.
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That is despite the Government's fiscal deficit for the nine months to the end of March being $4.1b lower than the Treasury had forecast in December.
“The base is so much better than had been anticipated, so all other things being equal, you would have expected that to flow through to the later years,” Toplis said.
Nevertheless, while $2.1b might “sound like a lot”, it was small in the context of total government spending, he said.
“A swing from a surplus of 0.5% of GDP” to a deficit doesn’t necessarily herald a big miss, he said.
There are two possible explanations for the disappearing billions.
The Government could be planning to shell out a lot more money in new spending over the next few years than the Treasury had been anticipating late last year.
Or the Treasury may be expecting lower tax revenues and perhaps higher social welfare payments, due to a significant deterioration in the economic outlook.
It could be a combination of both; higher than previously forecast spending and lower than previously expected tax revenues.
But Toplis noted that, in December, Robertson had already been signalling $6b in extra spending in the Budget for next year, in part to write off the deficits that have built up within the country’s 20 District Health Boards to clear the decks for their abolition in July.
Since then, political pressure has come on the Government to better target spending to avoid exacerbating what has been described by the Opposition as a “cost of living crisis”.
“I think they probably wouldn’t want to draw a heck of a lot more criticism by spending the $6b and then a bucket load more on top,” Toplis said.
That meant the more likely explanation for the vanishing surplus is a downgrade to the Treasury’s economic assumptions “in light of the dramatic shifts in the international environment”, he said.
He speculated that the Treasury might now be forecasting much lower company tax revenues.
“We are just hypothesising, but what we do know is that the bit of the tax take that moves around the most is corporate taxes.
“Given we know ‘corporate New Zealand’ is under substantial pressure from rising input costs, it wouldn’t be a surprise if some of the expected shortfall in revenue came through that.”
The Treasury might also be expecting a drop in construction and other demand to eat into GST receipts, he said.
Infometrics principal economist Brad Olsen said he would be bemused if the Government thought it was going to have to pay out higher benefits “because the labour market looks fairly tight and it is hard to see that collapsing around our ears”.
“I think realistically it is probably a reduction on the revenue side off the back of house prices falling, interest rates rising and higher inflation.”
Even at the time of the HYEFU, some of the Treasury’s forecasts were labelled optimistic in some quarters.
The forecasts released in December were nailed down before Omicron arrived in New Zealand in November and included an expectation that the economy would grow 4.9% in the year to June next year.
Olsen said it was important to remember that through most stages of the pandemic, the Treasury had undercooked government revenues and the strength of the economy, “so I think there was a need, quite rightly, to bake in some more of that support”.
The Treasury was also then forecasting a four-year period between this July and June 2026 when wage growth would outstrip inflation by between 1.4% and 2% each year, leaving real wages about 7.5% higher in real terms at the end of that period.
But Olsen notes that at that time, it was expecting annual inflation to peak this year at 5.1%, whereas it has already since risen to 6.9%.