Businesses fret as politicians squabble over economic management

Thursday, 21 December 2023

Gloomy forecasts from the Treasury and an admission by Finance Minister Nicola Willis that the Government will have its work cut out returning to surplus by 2027 spawned acrimony among politicians but appeared to leave financial markets largely unmoved.

Willis accused the former government of “economic vandalism” on Wednesday after the Treasury confirmed the outlook for both the economy and the Crown’s fiscal position were both deteriorating before the coalition government took power.

An already-thin surplus of $2.1 billion that the Treasury had pencilled in for the government’s operating balance in the year to June 2027 was whittled down to $140 million in the Treasury’s Half Year Economic and Fiscal Update (Hyefu).

The Treasury announced it expected to borrow $7 billion more over the next 2½ years than it had forecast in September as moribund economic growth cut into tax revenues and higher interest rates push up the Government’s borrowing costs.

The New Zealand dollar and the NZX 50 index barely changed on Wednesday’s developments, but BusinessNZ advocacy director Catherine Beard said the picture painted by the Hyefu was worse than anyone was expecting.

BusinessNZ’s own measures of activity in the manufacturing and service sectors had not been looking good for seven to eight months, so the economic slowdown had definitely arrived, she said.

“It’s clear that if we carried on the track we were on it would not be good for anyone.

“From a business perspective, we feel that more careful government spending has been needed for some time, because excess spending does not really help the economy rebalance itself.”

Alan McDonald, head of advocacy and strategy at the Employers and Manufacturers Association, said there was not much good news for business in the Hyefu, though it was clear the Government wanted to act on infrastructure projects.

There was a big bump in business confidence with the change of government, he said.

“But there needs to be something to sustain that and there is not really much there to do that, other than the attempts to reduce red-tape and regulation, which will make it easier for businesses.

“Basically, we are looking at a slower than expected recovery, and alongside that the global economic outlook is not looking great either.”

Willis said the Treasury’s newest forecasts – which did not take into account economic data after November 6 or any of the new government’s policies – revealed a shrunken surplus, bigger borrowing requirements, “greater fiscal risks” and higher debt.

The country was grappling with a “toxic trio” of high and sticky inflation, high interest rates and reduced economic output, and the job of delivering a surplus in 2027 had got a whole lot harder and would require “all hands on deck”, she said.

It remained the Government’s intention to deliver a surplus by 2027 but “the core thing” was the country needed to credibly show that it was taking the steps needed to be financially sustainable, she said.

Treasury secretary Caralee McLiesh said the average annual economic growth of 1.5% that the Treasury was expecting over the next two years would be driven “entirely by population growth”.

ANZ senior economist Miles Workman said that outlook was a little optimistic, in part because it didn’t take into surprisingly weak GDP figures released by Stats NZ last week which Capital Economics warned puts a double-dip recession back in play.

The Government would face some “very tough decisions” over the next few months to avoid a surplus slipping back another year, Workman said.

Westpac chief economist Kelly Eckhold cautioned on Tuesday that if concerns over government debt and the country’s balance of payments deficit prompted a downgrade of the country’s sovereign credit ratings that would have real consequences for businesses and consumers.

“That would ultimately mean all of New Zealand has to pay a higher tax bill because of higher interest costs which would flow to the government bond rate all the way through to fixed mortgages,” he said.

Former finance minister Grant Robertson, who has long held out a ratings upgrade by Standard & Poor’s in 2021 as evidence of his own economic credentials, expected ratings agencies would wait for more detail on the Government’s plans, which he said its Wednesday statements lacked.

“It will be next year before you get any real reaction I expect,” he said.