The Prime Minister yesterday engaged in what looked like a pre-emptive strike designed to counter what is likely to be a series of depressing economic statistics expected before the end of the week.
He opened his weekly post-Cabinet press conference with a recitation of the Government’s achievements.
“It certainly has been a mammoth year for government because we got a mammoth amount of work needed to get New Zealand back on track and I think New Zealanders should hopefully feel confident that our plan is starting to rebuild the economy to reduce the cost of living, make Kiwi safer by restoring law and order, improve the quality of education so that kids are ready to do what they need to do to their futures and deliver better health care for everyone,” he said.
He followed the achievements with what Winston Peters last week called “dashboard crap” as he recounted the Government’s progress on meeting its latest targets.
“Technically, we’ve got a couple of weeks left in Q Four, but today I’m providing an update on our progress,” he said ignoring the fact that there is unlikely to be much if any Government activity during the last week of “Q Four which is Christmas week.
“And I’m proud to say that when we close out for the year, the Government will have ticked off 42 of the 43 actions in our Q four plan.”
He did claim that fiscal and monetary policy had worked together to enable inflation to drop to 2.2%, creating the conditions for three OCR cuts and much-needed mortgage relief.
But that drop has come at a cost and that will be evident on Thursday when Statistics NZ unveils the September quarter GDP figures.
Kiwibank and Westpac are both forecasting that to be negative.
Kiwibank’s economics team said in a note yesterday that though Statistics NZ was revising some figures upwards the economy had now seen negative growth for two years.
The problem is that the employing industries are bearing the brunt of the recession.
“Weakness is likely to be spread across the board with our estimates showing around half of the industries in decline over the quarter,” said Kiwibank.
“But it’s the goods producing industries – manufacturing, construction, and the utility services (electricity, gas, water, & waste services) that are looking to be the largest drivers in the contraction.”
For all that, the politically crucial unemployment rate of 4.8 percent is only slightly above Treasury’s forecast from December last year of 4.5 percent.
The New Zealand Institute of Economic Research (NZIER) released its Quarterly Predictions yesterday and they were gloomy.
The Institute expects unemployment to peak at 5.3 percent next year and fall below five percent until 2026/27.
This is not necessarily a politically fatal number. The Key government presided over unemployment at 6.6 percent in 2009 and went into the 2011 election with the rates above six percent.
But the GDP figure is only one of the indicators due out this week.
Today will be the half-yearly economic and Fiscal Update, and all eyes will be on the projected deficits and whether the Budget Operating Allowance for next year has changed.
That allowance is currently at $2.4 billion which even Treasury said was not enough.
Any revision of that figure will be driven by the need to accommodate the possible $1 billion overspend in Health against the Public Finance Act requirement to maintain “prudent levels of debt.”
The former Treasury Secretary Gabriel Makhlouf defined that as net government debt being around 30 percent of GDP.
It is currently at 43.1 percent, and Treasury’s last forecast in the Budget was that it would move down only to 41.8 percent by 2028.
But net debt is an economic indicator that is simply an abstract figure to most voters.
The much more tangible indicators will be the level of activity in the real economy, and the NZIER can see some green shoots with growth picking up to 2.2 percent in 2026.
Beyond 2025, lower interest rates are expected to drive a pick-up in growth.
“Forecasts of household spending have been revised higher,” they said.
“More households in recent months have been fixing their mortgages at shorter fixed terms in anticipation that interest rates will decrease.
“With over half of the New Zealand mortgage book due for repricing within the coming six months, many households will roll onto lower mortgage rates and face reduced mortgage repayments.
“This, along with the income tax cuts, is expected to support a recovery in
discretionary household spending over the coming years.”
That forecast will please the Prime Minister.
“Mortgage rates are lower, providing relief for homeowners, and the government has delivered its promise of tax relief,” he said yesterday.
And in what may prove to be a popular move he announced that the Government would attempt to trim back the local government’s ambitions and consequently ease pressure on local government rates which have been a major component in inflation.
“Cabinet has agreed to a package of local government reforms to rein in rates increases by focusing councils in delivering core services and essential infrastructure spending within their means and being subject to greater scrutiny,” he said.
“The Government reform program will remove references to the four well beings from the Local Government Act.
“It will restore a purpose of fixing the key issues that councils are focused on fixing; filling potholes, Delivering core local services.”
That will be welcome news in Wellington, where the Council has just forecast another rate increase of 10+ percent next year.
But at the Beehive the fiscal challenge facing the Government is huge.
To bring Makhlouf’s net debt figure back to 30 percent, a 13 percent reduction would be necessary.
That is not technically impossible.
The National Government’s net debt dropped from a peak of 54.8 percent in 1992 to 45.3 percent over the next two years.
But whether the country and the National Party are ready for another Ruth Richardson, the ultra-dry Finance Minister who reigned in the spending, is another matter.
Richardson now supports ACT. They are probably the only people in Parliament who would favour a repeat of the 1990s.
Meanwhile Luxon will look for victories where he can.
