New Government spending will boost NZ economy, says Reserve Bank

Thursday, 9 November 2017

Higher minimum wages and a new house building programme will boost economic growth, more than offsetting a sharp fall in immigration, the Reserve Bank says.

On Thursday, the central bank gave its first take on the direction of the new Labour-led Government, which it stressed was preliminary, and said the impact was 'very uncertain'.

However, acting governor Grant Spencer said the bank's initial assessment was that the combination of a new house building programme, a sharp increase in the minimum wage, lower immigration and higher general government spending would add around 0.5 per cent to economic growth in each of the next three years.

A fall in gains from immigration was 'a net negative' to growth, Spencer said, 'but the overall impact of the new government policies is a positive stimulus to aggregate demand'.

READ MORE: Slower growth and early spending plans could push Government borrowing higher

The Reserve Bank's assessment of the economy was more positive than commentators expected, after Spencer appeared to hint in August that growth was slowing.

But falling investment in construction has now been replaced by an expectation of added 'fiscal stimulus' - or higher government spending - meaning economic growth over the next 18 months is now expected to be only marginally weaker than predicted in August.

In forecasts likely to be welcomed in the Beehive, while the Reserve Bank is predicting slightly higher inflation, the official cash rate - which was left unchanged at 1.75 per cent - is expected to stay low until 2019.

Lower growth also influences the tax take of the Government, which if cut could force Finance Minister Grant Robertson to choose between promised initiatives, and posting deficits when he delivers the Budget in May.

The Reserve Bank forecasts do not cover the level of government debt, which BNZ head of research Stephen Toplis said could be 'substantially higher' than Labour had suggested.

National finance spokesman Steven Joyce called on the new Government to give more detail on its spending plans, as it was clear that economic forecasting was being affected by the 'lack of clarity'.

'This is not a surprise as we are all still yet to see the figures underpinning the coalition agreement between Labour and New Zealand First, which was signed over two weeks ago, and we are all still yet to see the Government's mythical final 100 day plan,' Joyce said.

He claimed the Speech from the Throne at the opening of Parliament contained 51 new spending commitments 'which will put significant pressure on the Government's spending track and net debt'.

Cameron Bagrie, chief economist at ANZ, said government spending had taken on added importance in assessing monetary policy.

'[I]t's clear that fiscal policy will be a lot more expansionary relative to what was flagged in the 2017 Budget.'

Bagrie, who predicted in recent days that the Reserve Bank would trim its growth forecasts further, added caution.

'We are less upbeat than the Reserve Bank on the growth outlook.'

The Reserve Bank's assessment

Spending initiatives

Government consumption is expected to be about 3 per cent higher than assumed based on the May Budget, adding around 0.5 per cent to economic growth. But the Reserve Bank warned that this may mean households spend less.

'Increases in government consumption could be partly offset by a decline in household consumption if households assume increased government expenditure will necessitate higher taxes in the future.'

Higher minimum wages

A promise to increase the minimum wage to $20 per hour by 2021 will boost incomes, but the Reserve Bank said it was 'uncertain how businesses will respond' to the rise.

The increases were likely to spill over elsewhere, which could slow employment growth.  'The lift in minimum wage may spill over to workers in higher wage brackets, and could impact on businesses' labour demand and hiring intentions.'

Higher wages could also encourage people who are choosing not to work to start looking, even though labour force participation is at a record high.

KiwiBuild

The Government has announced plans to build 100,000 houses in a decade; the Reserve Bank said by 2020 the programme was assumed to be building 10,000 homes a year. But the Reserve Bank warned that even though Labour proposed a new 'KiwiBuild visa' the spending would mean existing construction levels would fall because there is not enough people to do the work.

'[O]ur working assumption is that around half of the proposed increase will be offset by a reduction in private sector activity.'

Lower migration

The Government had said it wants to make it harder for people to get work and student visas, cutting annual migration by 20,000-30,000 people a year. The Reserve Bank said it now expects a 'faster decline' in permanent and long-term arrivals, but little change in the flows between New Zealand and Australia.

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