The speech yesterday by Treasury’s Chief Economic Advisor warning that the books are in worse shape than forecasted looks like it’s part of a softening-up process for either more cuts or a longer wait to get back into surplus.
The speech was a highly unusual public preview of Treasury’s Half-Yearly Economic and Fiscal Update (HYEFU), which is due on December 13.
Usually, Treasury makes that public on the day without any previews or prior comments, partly because of its potential to influence the finance markets.
But the fact that it has been done this way this year suggests its contents may be a bigger shock than usual.
POLITIK understands Dominick Stephens’s speech was approved by the Minister of Finance, Nicola Willis, who is currently in Antarctica.
She therefore was unavailable for comment yesterday.
But given that next year’s Budget was already under pressure from the unforecast massive cost blow out at Health New Zealand, Stevens’ news yesterday must inevitably mean that the Government won’t meet its target of getting back to a slim surplus by 2028
Stephens’ headline message was simple.
“Recent data has suggested that the economic downturn has been deeper, and the recovery may begin later, than the Treasury forecast at Budget 2024,” he said.
Add to that a further problem.
“Quite separately from the economic outlook, there has been a second reason that the Treasury has been revising its revenue forecasts lower,” he said.
“Tax revenue has proven lower than expected given the state of the economy in recent economic and fiscal updates.
“Recent monthly data has shown that tax revenue overall has been close to the Treasury’s Budget forecast, but the detail reveals that GST collections have been surprisingly low relative to underlying economic activity.
“If this trend continues, there could be further downside risks to the Treasury’s revenue forecasts.”
What he didn’t say yesterday was that there has been no evidence that the blowout in the Health NZ costs has been contained so far.
The Government financial statements for the three months ending September show HealthNZ having already spent $401 million more than its Budget.
At that rate, it would be $1.6 billion over Budget by the end of the financial year. Most of that overrun has been due to a budgeted increase in nursing staff.
But to make matters worse, the NZ Nurses Organisation will begin a series of rolling strikes next week in support of a wage claim that seeks a 19% increase to reach pay parity with Te Whatu Ora pay rates and a flat-rate salary increase of $4,000 for all registered nurses.
The Budget Operating allowance for 2025 is only $2.4 billion and Willis has already said all but less than one billion dollars of that is already accounted for.
There is thus very little, if any, wiggle room to accommodate both the reduced tax revenue and the health spending blowout.
Something will have to give.
The obvious thing to do would be to extend out the target for the deficit to become a surplus.
Answering a question in Parliament on Wednesday on behalf of Willis, Chris Bishop hinted that the deficit target would be relaxed.
“The Government is not going to be a slave to a surplus target,” he said.
“It is correct that over the last few years each update to the economic forecast has involved a deterioration in the outlook, which then flows through into the fiscal forecast.”
Currently the Government is forecasting that the books will return to surplus in 2028 when a surplus of $1.1 billion is forecast.
Perhaps one saving grace is that debt as a percentage of GDP is forecast to peak in the next Budget year, which may make some slippage in the following years look less politically drastic.
But as Stephens warned yesterday, Willis will have to be careful how loosely she relaxes.
That is because the tidal wave of ageing baby-boomers is approaching fast.
“New Zealand’s population is growing older, with an increasing share of the population over 65,” Stephens said.
“The Government spends considerably more on over-65s than it gathers from them in tax revenue
“Therefore, as the over-65s become a larger share of the population, the public purse will be stretched further.”
Stephens has identified one further factor that is dragging the books into the red.
“The more immediate challenge for closing the structural deficit has been a deteriorating economic outlook,” he said.
“This is not simply the case of a deeper economic slowdown, although this appears likely.
“The Treasury has been revising its assessment of future economic activity at successive economic and fiscal updates.
“This has led to successive downgrades to our forecasts for government revenue, independent of government policy.
“A key reason for Treasury’s weaker economic forecasts has been accumulating evidence of a sustained productivity slowdown.”
Treasury has been studying productivity in New Zealand all year producing research papers and also bringing in academic experts from New Zealand and overseas.
Stephens said there was accumulating evidence that the trend rate of growth in productivity here has slowed.
Growth averaged 1.4% in the 20 years up to 2013 but slowed to zero from 2014 until the end of 2019.
There was a surge in productivity during Covid but that has now returned to its pre-Covid levels.
“The data now suggests that a slowdown in trend productivity growth began in the mid-2010s and was only briefly interrupted by pandemic-era volatility.
“As this reality has slowly been revealed by the data over the past two years, the Treasury has lowered trend productivity in successive forecasts.
“That said, we still expect some productivity pick-up as the economy recovers.”
Willis has been forthright in her view that it is critical that New Zealand address the productivity issue. She made it known she wanted the Treasury Secretary who would replace Caralee McLiesh to be someone who could turn Treasury into a powerhouse of ideas on productivity.
The replacement, Ian Rennie, will need to be good because Stephens said a 2024 Treasury Paper had identified a range of probable causes for the productivity slowdown “including poor diffusion of innovation, weak investment, and a slowdown in international trade and connections.”
“Based on an analysis of current trends, the paper concluded that productivity growth was most likely to remain slow over the coming years,” he said.
Things are bad.
Stephens said the fall in per capita GDP since 2022 made this a larger per-capita recession than the Global Financial Crisis 2008 2010.
The Government is going to have to change its political tack as a consequence of Treasury’s numbers.
Until now, its general line has been that once it cleared away the excesses of Labour’s profligate Covid spending, all would be well.
It is going to have do more than that.
