Robertson will need more migrants

Even Grant Robertson doesn’t sound like he believes he can pull off his $8 billion infrastructure boost without maintaining high levels of immigration.

He certainly sounds more realistic than Treasury whose Half Yearly Economic and Fiscal Update is forecasting net migration to fall to 35.000 in 2023 – 24.

Robertson has heard the pleas from the Reserve Bank and business and is now proposing to allocate extra $12 billion out to 2023 on capital expenditure in a bid to avert an economic slowdown over the next two or three years.

While $8 billion of that is new borrowing and will be allocated by a so-far opaque process to a variety of transport, health and education projects, the balance will be added to the multi-year capital allowance which was running low at this year’s Budget with only $4.4 billion for the next three budgets.

All up though, a sizeable percentage of the new spending will be on infrastructure, and that means construction of one sort or another. And that will mean more migrants.

In a commentary, Westpac’s Economics team said: “The challenge here is not the willingness to spend, but the ability”.

They noted that capital spending had risen from its lows in recent years, but it had fallen short of what was projected in each of the last five Budgets, sometimes by billions of dollars.

“It remains to be seen whether the Government will be able to overcome the bottlenecks that have hampered its previous spending plans,” they said.

Treasury in the Half Yearly Economic and Fiscal Update document conceded that labour shortages could be a major issue.

It said that Treasury’s business talks and business survey measures continued to highlight the role of labour shortages in restraining the pace of growth in the construction industry.

And it suggests that because the labour market is tight “some resources will likely need to be reallocated to meet the increase in demand (for infrastructure investment).” it said.

Even so, Treasury is forecasting a decline in immigration.

Their forecast says net migration will decline from 50,000 persons in the year ended September 2019 to 35,000 in the year ending June 2024.

Robertson disagrees.

“I have continually believed that where we’ve settled at around 50,000 at the moment seems to me to be likely where we will stay,” he said yesterday.

“The forecasts that are a little below that.

“But the good news for everyone in the room is that net migration continues to outperform the forecasts that is a net benefit to the economy.”

That, of course, was the argument that the Key Government used to justify its high levels of immigration.

In Opposition, Labour promised to take a “breather on immigration” by making sure that work visas were not being abused to fill low-skill, low-pay positions, while at the same time ensuring businesses could get the skilled workers they need. 

The consequence of higher immigration is likely to be felt in the housing market.; that much is conceded by Treasury.

The HYEFU says that annual house price growth slowed to 1.3% over the past year, driven by price falls in the Auckland market.

“Demand for existing homes has likely been dampened by several factors including changes to the bright-line test, tighter regulations on overseas buyers and lower net immigration,” it said.

As usual, Treasury includes a series of risks and alternative scenarios to its main forecasts.

Here it has included a section headed on housing.

“Higher than forecast net migration and weaker than expected residential investment would drive up house prices faster than anticipated,” it said.

“ On the other hand, stronger than expected housing supply growth and weaker than forecast net migration would lower house price growth.”

But there is an upside to rising house prices.

“Stronger house price growth raises consumption and housing supply to increase economic growth, while weaker house price growth reduces it.”

But for most households, wages will be the main determinant of wealth.

And the HYEFU is positive on the possibility of wage growth.

“Wage growth is expected to continue at around September’s quarterly pace over the year ahead, resulting in annual growth of 3.0 %,” it said.

“Thereafter, wage growth picks up gradually and reaches 3.7% by the end of the forecasts (

“Government policy continues to support wage growth through an additional 13% increase in the minimum wage, spread over the next two years, and through a number of pay equity and other collective settlements.”

 The forecast is for COE growth to slow to 4.4% over 2019/20 as wage growth eases.

Stronger employment and wage growth underpin a rise in compensation of employees to 5.1% over 2021/22 and beyond.

The Opposition has chosen to attack Robertson’s borrowing announcement by arguing that Labour has presided over a slowdown in economic growth.

It has also focused on Labour exceeding its original Budget Responsibility Rules forecasts of debt to GDP ratios.

Robertson replied saying the coalition Government had inherited a net debt ratio of 22.9 per cent and that even with the new borrowing, Treasury was forecasting the net debt to fall to 21.5 per cent in 2021/22 and to 19.6 per cent by 2023/24. However, in its pre-election Budget Responsibility Rules, Labour had forecast the debt ratio in 2021/22 to be 20 per cent.

But Goldsmith said Labour would not ’t need to break their debt promise if they had not wasted billions of taxpayer money on failed experimental policies like KiwiBuild, Fees Free or the Provincial Growth Fund.

Given that the argument is over 1.5 per cent of an economic indicator, Robertson may feel more confident that he is ahead if he can start to get some of his infrastructure projects on the go.

Robertson was confident yesterday that despite the challenges, he could get the projects going next year.

“Of the twelve billion dollar capital investment package, it includes eight billion dollars of effectively shovel ready projects that can be brought forward,” he said.

“This includes six point eight billion dollars for new transport projects with a significant portion of that going to roads and rail; three hundred million dollars for District Health Board renewal… these are projects that can be brought forward and done quickly alongside the biggest long term capital investment.”

The intention of the infrastructure spend is to keep the economy ticking over for it to take the place of a monetary policy stimulus which would be the usual response to the kind of cyclical downturn that appears to be on the horizon.

But with the official Cash Rate at one per cent, the Reserve Bank is running out of room to cut, and the focus has shifted to the Government.

That raises questions about what Robertson will do about next year’s Budget.

Last year’s Budget Policy Statement forecast “new” spending of $2.4 billion a year out to 2022 but Robertson has now given himself $3 billion to play with next year.

This may add to speculation that the Government will make a move, either through transfer payments or restructuring of income tax thresholds, to address some of the inequality issues that the abandoned capital gain tax was intended to deal with.

But what is clear is that the infrastructure investment is one of the first planks in Labour’s 2020 election campaign.

That is why Robertson is holding back the detail of exactly what will be funded until next year.

How to spend Grant’s billions

From the Infrastructure Commission’s pipeline 

KiwiRail

NZTA