Treasury shrugs off plunge in confidence with rosy outlook for economy

Thursday, 14 December 2017

National Party pollster David Farrar says the forecasts are good, but there's a big challenge for the Government.

OPINION: Treasury has delivered the new Government a set of rosy economic forecasts, but there is still little room to manoeuvre.

The half year economic and fiscal update (HYEFU), released on Thursday, points to both strong jobs growth and higher wages, partly driven by the decision to hike the minimum wage.

New Zealand's economy is expected to grow marginally more slowly in the short term as the new coalition cancels National's tax cuts.

Treasury, headed by Gabriel Makhlouf, has effectively endorsed Grant Robertson's plan to get net debt to below 20 per cent of gross domestic product.

However more government spending, including $2 billion being injected into the Kiwibuild house building programme, will see growth boosted from 2020 and beyond, to above what Treasury was expecting prior to the election.

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Plug in a raft of new Government initiatives, estimated to cost more than $21 billion in the coming years, and Treasury has effectively endorsed Robertson's plan to get net debt to below 20 per cent of gross domestic product.

Indeed, the Treasury figures see net debt falling to 19.3 per cent by 2022.

Treasury's forecasts are always open to scrutiny and can never be perfect because they are based on a series of assumptions which are open to debate. Some may well turn out to be too optimistic.

A plunge in business confidence which is now at the lowest level since 2009, is expected to be short lived.

This means Treasury was willing to put its name next to employment growth of 3 per cent in 2018, with unemployment progressively dropping to 4 per cent.

How the current pessimism plays out is unknown, but most surveys have pointed to a corresponding fall in hiring intentions.

Some economists have also suggested that hiking minimum wages will not only put off some employers from hiring, it would improve the economics of labour saving investment.

Adding up the cost of Government policies also leaves little room for unexpected items which come up, or for areas such as higher wages in the public sector.

After years of restraint under National, teachers and nurses might be expecting more than what Robertson has left aside for wage demands.

But for now, at least, in his first major event as Finance Minister, Robertson's plan is on track.