Economists cast doubt over Treasury's 'optimistic' forecasts

Thursday, 14 December 2017

Treasury secretary Gabriel Makhlouf outlines the half year economic and fiscal update, which would see Labour meet its target of cutting debt as a share of the economy. But economists have cast doubt on the forecasts, with Westpac saying Treasury was being 'far too optimistic'.

Treasury's outlook for the economy has been dubbed 'optimistic', with economists warning debt levels are likely to end up higher than forecast.

Thursday's half year economic and fiscal update (HYEFU) forecast that economic growth would average close to 3 per cent over the next five years, peaking at 3.6 per cent in 2019.

Finance Minister Grant Robertson arrives to present the half year economic and fiscal update to journalists on Thursday.

Unemployment is also forecast to fall to 4 per cent, despite hikes in the minimum wage pushing wage growth significantly higher.

The forecast sees revenue growth rising sufficiently to see net debt fall to below 20 per cent of gross domestic product by 2022, a core promise of Finance Minister Grant Robertson.

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But bank economists questioned whether growth would hit targets, which would ultimately lead to lower tax revenue.

'Treasury's being far too optimistic here,' Westpac chief economist Dominick Stephens said. Westpac is forecasting that economic growth in 2019 would be almost a full percentage point below Treasury's estimate in 2019.

Since the election business confidence has plunged to levels last seen in the global financial crisis, which ANZ has said poses a material threat to the economy.

Treasury secretary Gabriel Makhlouf said the forecasts assumed the drop in confidence was assumed to be only temporary. The forecasts assumed employment growth of 3 per cent in 2018.

Stephens said pessimism in the business sector would impact investment decisions.

'They've made no allowance for the plunge in business confidence that we've seen. I think that that's going to impact business investment early next year.'

ASB said it expected growth to be lower than Treasury was forecasting, while inflation was likely to be weaker, which would cut revenue growth.

'[We have] a view that the nominal [economic growth] outlook is too strong,' ASB chief economist Nick Tuffley said.

'We just see the risk of the revenue growth not being as strong as what's being banked on.'

ANZ senior economist Phil Borkin said the Treasury's outlook should allay fears in some circles that the new Labour-led Government would oversee a deterioration in the fiscal position.

'Nevertheless, we are left with the impression that the numbers represent something of a best-case scenario,' Borkin said.

'Given our less optimistic views on the growth (and hence revenue) outlook, together with what we see as likely pressures on costs and spending demands, we ultimately see the risks skewed only one way.'

Robertson outlined his debt target in Labour's fiscal plan before the election. He has described it as an 'anchor' which both prepares New Zealand for future shocks and imposes discipline on the Government.

National finance spokesman Steven Joyce said the forecasts left Labour with little room to move within its plan, meaning the debt target was unlikely to be reached.

'The coalition has set up very tight operating allowances for their future spending and have left very little room for dealing with the ongoing spending pressures that any Government faces.'

The target actually sees debt grow in nominal terms, peaking at just under $70 billion in 2020, but remaining stable as a share of the economy.