Has National’s moment come?

The election campaign will now turn to the economy with Treasury yesterday publishing forecasts showing that the economic hangover from Covid-19 could stretch out for another 15 years to 2034.

At the same time with house prices projected to stay high, it is likely inequality will increase.

There will be more bad news today with the June GDP figures expected to show a record drop.

National will seek to capitalise on all this bad news by releasing its fiscal policy also today. (correction: That release is on Friday) The party’s strategists have long believed that the election could turn on this economic data if it was negative.

It was certainly that and Finance Minister Grant Robertson yesterday could hardly have been more downbeat.

 “This will be a long journey because we have had to borrow significantly to protect New Zealand businesses and households,” said Robertson.

The Treasury document was equally pessimistic.

 “Even when borders are reopened the pace of the recovery in New Zealand is expected to be slower than forecast in the Budget Update,” it says. 

“This reflects economic scarring and the greater degree of uncertainty in the world economy, which in New Zealand will be felt particularly in communities for which international tourism is an important source of jobs.”

Treasury’s numbers are grim.

What this table shows is rather than a sharp  8.1 per cent uptick in growth in 2021/22 we are going to see a flatter climb out to 3.6 rather than 4.1 per cent in 2023/24.

That means unemployment will remain above five per cent in 2024 and the deficit will still be a substantial $12.4 billion that year.

But the depressing figures are that growth in 2034 will be a sluggish 1.8 per cent with unemployment still stubbornly high at 4.8 per cent and the Government still in deficit (albeit by only $500,000), but the core crown debt to GDP ratio at 48 per cent will be higher than t is now.

Robertson said that ratio as not just a product of the high level of borrowing but was also influenced by the fact that the economy was not growing by as much as was projected in the Budget.

National has been arguing since Covid-19 first struck that eventually, we would see figures like this.

“We have been in the worst recession in living memory, and it is one where the only answers we hear from the current government is to tax more to borrow more and to add more welfare,” said National Leader, Judith Collins.

“The last time there was a recession, even anywhere near the magnitude of this one was in the late 1990s.

“And it took years of hard work by lots of people, particularly in business and their employees, for basically a decade to come out of that.

“Now we have looking for 15 years of deficits, 15 years, which will mean that it’s not just our children who pay for this, but also most likely our grandchildren.

“The only way to get out of this is through growth with a positive attitude about what can be done and understanding that everyone is going to have to pull together to grow the economy because we cannot get ourselves of this by simply taxing.”

National’s Finance spokesperson Paul Goldsmith was equally blunt.

“We’re seeing a shrinking economy another 100,000 New Zealanders losing their jobs over the next couple of years and deficits as far as the eye can see,” he said.

“And so that underscores the importance of having a focus on growth and getting New Zealand back on track.”

But National’s rhetoric was somewhat at odds with its actions yesterday with a pledge to spend another $200 million a year on various health policies.

ACT leader David Seymour was, as usual, critical of another National spending promise.

“You can’t outspend the Labour Party,” he said.

“You can’t win that way.

“The right has to win on fiscal responsibility.”

National is going to unveil its economic plan and its fiscal policy today. (on Friday)Until we see that we can’t really judge how they plan to display the fiscal responsibility that Seymour is calling for.

However, Goldsmith said that unlike their response in 1990, it would not involve benefit cuts.

There was some good news for the Government though from one bank economist.

Westpac economist Michael Gordon he thought Treasury was too pessimistic about the longer-run outlook for New Zealand. 

“2020 has been a lesson about the economy’s dynamism, with activity bouncing back readily as Covid restrictions have been lifted,” he said.

“As a result, our view is that the nation’s fiscal outlook, while still challenging, will not prove to be as dire as the PREFU portrays.”

And Gordon said Treasury’s view on the extent of the rebound was too pessimistic.

“By the end of 2022 – after a year of reopened borders – the Treasury expects the level of GDP to return to around its pre-Covid level,” he said.

“This is about 6% below what was forecast in the December Half-Year Update, its last set of pre-Covid forecasts.

“That seems on the weak side, given that we’ve already seen that at Alert Level 1 – with the borders closed – the economy can operate at about 5% below its potential.”

But there was one surprising section in the PREFU where the forecasts might be judged as being too optimistic.

Treasury said Housing market activity had been more resilient than expected in the Budget Update, supported by pent-up demand, involuntary savings during Alert Levels Four and Three and looser monetary conditions. However, various competing forces make the outlook for house prices particularly uncertain.

“Border restrictions are likely to constrain net migration in the short term, and heightened uncertainty around the economic outlook constrain demand for housing,” the PREU said.

“Low-interest rates and the temporary removal of the Reserve Bank’s loan to value ratio restrictions are expected to provide some offset.

“On balance, we forecast a period of weaker house prices over the year to June 2021, with prices falling 5.1% from their March 2020 levels, dampening consumption growth.”

But once the border is reopened Treasury expects migration to rise again to 35,000 in2023/24 but still a far cry off the record  64,000 net migration in 2015/16.

“House prices then recover as net-migration rises, economic confidence recovers and monetary policy remains accommodative throughout the forecast period.

“Rising housing wealth is then expected to support the recovery in consumption growth over the final three years of the forecast period.

“However, given the recent resilience in the housing market, there are upside risks to our forecasts if the current sentiment is maintained.”

In other words, house prices could rise faster and higher.

Robertson was defensive when asked about the projections.

 “There’s a huge amount of uncertainty about what will happen there,” he said.

“But quite clearly, part of the monetary policy response that we’ve seen from the Reserve Bank is the view that they need to continue to keep interest rates low and keep a very accommodative monetary policy in order to stimulate the economy.

“The housing market has received some benefit from that. I do acknowledge that.

“Equally across the period, we’ll also see wages rise as well.

“And we’ll continue to do our bit on the other side of the housing ledger.”

National clearly finds questions about rising housing prices and their impact on social cohesion awkward.

That may be because many of their supporters benefit from what Treasury said in the PREFU document when they said growth in private consumption closely tracked house price growth.

Asked if it was time for a debate about the Reserve Bank and its impact on the housing market all Collins would say was that it was time for a  debate about growing the economy.

That will be National’s pitch for the rest of the campaign.

But their problem remains as it always was. They are still scoring little over half the vote share that Labour is.

Not only the economy has a tough journey ahead of it.