Fiscal crunch: Tuesday may show if numbers adding up for Nicola Willis

Saturday, 14 December 2024

ANALYSIS: After last week’s quasi-announcement on Interislander ferries, Finance Minister Nicola Willis has another extremely tough sell on Tuesday.

She will need to drum up enthusiasm for the Government’s Budget policy statement against the backdrop of what will be a darkening update from Treasury, in its Half Year Economic and Fiscal Update (Hyefu).

The Hyefu sits not far behind the Budget itself as a key event in the economic calendar, with the Treasury setting out its forecasts for the economy and the Government’s finances for the next 4½ years.

ACT Party MP Simon Court summed up the problem facing Willis earlier this month when he told a select committee “1% GDP growth seems like Nirvana and ‘unicorns and rainbows’ right now”.

Sure, he made the observation in the context of casting doubt on an assertion by former Climate Commission Rod Carr’s that the country could afford to do more to help tackle global warming.

But the point stands that despite a strong up-tick in business and consumer sentiment, reported economic growth remains stuck in the doldrums.

As NZ First leader Winston Peters brutually pointed last month, tax cuts that kicked in August have had “no material or beneficial effect in terms of growth in the economy”.

The situation should improve somewhat as lower interest rates and brightening sentiment persuades consumers and businesses to open their cheque books for more spending and investment.

But the question is: how much better, and how soon?

Last month, the Reserve Bank slashed its forecast of the growth that could be expected in the two-year period to March 2027 from 6.2% to only 4.4%.

Its chief economist, Paul Conway, has talked of “pedestrian growth” ahead.

The Treasury has already made clear it will delay the start date for a recovery and downgrade its growth forecasts in the Hyefu.

BusinessNZ has described the economy as being in a holding pattern with “only modest growth on the cards”, next year.

It is not only short-term growth forecasts that are under threat.

The downgrades are in part being prompted by a fundamental rethink of the growth potential of the economy.

That is rooted in a slump in productivity growth that is also being experienced by most other developed countries and which has set the alarm bells ringing at both the Treasury and the Reserve Bank.

“In recent updates, the economic outlook has been progressively revised downwards independent of government policy,” Willis told Parliament on Thursday.

“That is because the Treasury has been winding back some assumptions made when the previous government was in office that, in hindsight, were far too optimistic about future economic growth.”

As well as being disappointing in itself, lower-than-expected tax revenues will make Willis’ task of bringing the Government’s budget back into balance much harder, perhaps impossible, under current tax settings.

Treasury chief economic adviser and deputy secretary Dominick Stephens warned in September the public purse would be stretched “further and further” as the population ages, sailing close to being explicit about a need to broaden the tax base.

The Hyefu on Tuesday may be the day when the penny drops for all but the most ardent of economically-liberal ideologues.

Willis noted last month that the Treasury had delayed the forecast return to surplus by a year, each year since 2021, signalling essentially that it would be no huge embarrassment if she did the same.

That would mean pushing it back by one to the year ending June 2029.

The Treasury pretty much has to forecast a return to surplus then, for the same reason the Reserve Bank always shows inflation falling within its 1% to 3% target band at the end of its forecast period.

It’s a requirement of the Public Finance Act that the Government brings its budget back into balance by the end of the forecast period, just as the Reserve Bank is in theory obligated to get inflation back within its target band in “the medium term”.

But as history shows, that doesn’t mean it’s actually going to happen, and that the Treasury might not delay a surplus by a further year, next year.

Willis looks set to recast the 2025 Budget as the “growth budget” after suggesting last year it might be dubbed the “social investment budget”.

So expect upbeat talk on Tuesday about the conditions that the Government is putting in place for growth.

Deputy Prime Minister David Seymour’s war on red tape isn’t showing many results yet and a free-trade deal with India isn’t in the bag, so alongside lower interest rates, the fast-track regime has been a favoured straw to clutch at in that regard.

But in the context of a delayed recovery, low productivity growth, this year’s tax cuts and an annual operating deficit that has been moving further off track in recent months, the question is whether the numbers are fundamentally adding up for Willis.

And whatever economic assumptions the Treasury’s new fiscal forecasts turn out to be based on, the further worry is that those assumptions will be overly optimistic.

The Treasury advised last month that its Hyefu growth forecasts wont factor-in any impact from President-elect Trump’s planned trade tariffs, as they were finalised early in November.

That means there may be more potential for disappointments than upsides ahead.

Willis could throw some smoke over the operating deficit by changing the way the Treasury presents its financial forecasts.

The key measure of how government finances have been reported up to now has been the “Obegal” operating balance, which takes into account the finances of Crown entities including deficit-challenged ACC.

But Willis has strongly hinted she intends to strip Crown entities out of the headline deficit measure.

That could make future deficits look quite different and accelerate the supposed return to surplus, even though any improvements gained wouldn’t change the underlying state of the Government’s accounts.

It’s also debatable there is much justification for a presentation change given ACC’s funding is set by the Government and its expenses very largely determined by legislation, case law and costs in the health system.

Willis wouldn’t tell The Post last week whether she might swap out the headline deficit indicator as early as at the Hyefu on Tuesday, saying she would provide an “update” on the matter then.

“All of the indicators will be available at Hyefu. We intend to be upfront, clear and transparent,” she said.

In the event that the accounts did look much better at very first glance on Tuesday than it seemed they should, it might be a matter of flicking ahead a few pages.

One figure that couldn’t be easily massaged is the Treasury’s estimate of the amount of debt it will need to create through the issuance of government bonds.

In the May Budget, it was revealed the Treasury expected the Government would need to borrow an extra $12 billion over the following four years, over and above its previous borrowing plans.

ANZ and ASB expect the Treasury to up that estimate by a further $4b to $6b on Tuesday to reflect the delayed forecast return to Obegal surplus and “wider-for-longer” government cash deficits.

Along with the size of the downward revision to GDP growth forecasts, that will certainly be one figure to watch for.