A series of Treasury “scenarios” for the economy suggest that if things get really bad the Government could bring forward the 2017 tax cuts and even use a sense of economic crisis to “make changes to what state services are provided.”

Treasury has released a briefing to Finance Minister Bill English from the first week of August predicting that unemployment could go above six per cent next year.

“Risks in the global economy remain skewed to the downside, particularly risks stemming from China,” the briefing says.

“The future path of commodity prices is uncertain.

“We expect an eventual recovery in dairy prices, although there is significant uncertainty about when any recovery in dairy prices may eventuate.

“Domestically, there are risks from slowing momentum in construction activity, subdued confidence and El Nino conditions.

“As a result, there is a material risk that the slowdown in growth could become even more marked.

“Sub-trend growth would likely lead to the unemployment rate rising above six percent.”

These themes have been repeated in an International Monetary Fund report on the New Zealand economy published yesterday morning.


It says the immediate outlook is “challenging”.

“The decline in dairy prices is still feeding through the economy,” it says.

“More broadly, New Zealand’s main trading partners, China and Australia, are slowing.

“Output growth is expected to slow in 2015 and remain somewhat below potential in 2016.

“Inflation is projected to rise to within the RBNZ’s target range of 1–3 percent in 2016, as the impact of the decline in oil prices drops out and the depreciation of the NZ dollar passes through.”

The IMF says the risks to the economy are:

  • Continued low dairy prices.
  • A sharper-than-expected slowdown in China.
  • A strong El Niño:
  • Continued high Auckland House prices: eventually leading  to a sudden sharp correction in house prices
  • Higher global financial market volatility. 

Ironically the advice came on the same day as an authoritative report suggesting that Auckland house prices may have peaked.

The Real Estate Institute of New Zealand reported that though there was a rise from $640,500 to $748,250( a 16.8% increase) in Auckland’s median price from October 2014 to October 2015, the media price fell three per cent from September to October.

“On a seasonally adjusted basis, Auckland’s sales volumes were down 15.3% compared to September, indicating that sales volumes were noticeably weaker in Auckland than would normally expected for this time of year,” the REINZ said.  

A possible explanation for that was the introduction on October 1 of two Government taxation measures designed to restrain house price increases.

Foreign buyers are now required to have an IRD number which also requires them to have a New Zealand bank account and though the legislation was still being debated in Parliament last night, property bought for investment purposes after October 1 and sold within two years will incur what amounts to a capital gains tax.

Though Labour is supporting the legislation it is critical of it — as were most of the submissions to the Select Committee which considered the Bill.

Labour Housing spokesman, Phil Twtyford, told Parliament that Inland Revenue expected to gather only $5 million n tax from properties subject to the “brightline test”.

“But there is billions of dollars in tax free capital gains happening as we speak every year in the Auckland property market,” he said.

”The Government doesn’t care about that.

“They don’t care about the loss to the economy.”

More restrictions on the Auckland investment property market will come next month when the reserve Bank’s “speed limits” tighten up lending to property investors.

But it’s The Treasury document which contains the starkest forecasts for the economy.

It presents four different scenarios which might unfold over the next few years.


Under this Scenario low inflation and increased labour market capacity are likely to result in weaker wage pressures

“Tax revenue outturns (and expenses) have surprised on the upside for the 2015 fiscal year with a 14/15 surplus considered more likely than at BEFU.

“Satisfactory progress towards fiscal objectives is expected over the next few years.

“However, risks have shifted into the 2016 fiscal year

”Staying within allowances will remain challenging on the spending side”

And the scenario says while a surplus looks more likely for 2014/15, economic developments suggest some headwind towards maintaining this for the 2016 fiscal year.


This scenario starts from an assumption that New Zealand has reached the peak of the current economic cycle and from now on its downhill.

 It assumes that both global and domestic demand fall, and that wage pressures fall AND unemployment increases which could put more pressure on social sector initiatives.

The situation could require the Government to increase spending.

Options could include fast tracking infrastructure investment and bringing forward the 2017 tax cuts.

And in a sentence which is sure to excite a paranoid response from many on the left, Treasury says: “(A) Sense of crisis may provide savings opportunities by making changes to what state services are provided.”


World prices for New Zealand’s exports continue to fall, stabilising at a lower level, close to the 20-year average. This is not offset by further falls in world import prices.

In this circumstance Treasury suggests austerity.

“As the permanent nature of the shock becomes clearer, a tighter fiscal policy response would need to be considered to meet the debt objective given structurally weaker tax revenue,” it says.

Depending on severity, options for tighter fiscal policy could include:

  • Cancelling tax reductions from Budget 2017
  • Reducing new spending  allowances from Budget 2018 onwards from

“More extreme options include reducing spending allowances in Budget 2017 and beyond, or consideration of a net-zero Budget, perhaps incorporating significant savings on major policy areas.

Achieving a net-zero budget may require changes to the expense or revenue bases.

Either way we continue to expect large pressures in health and education


Essentially, this scenario involves an economic downturn that is amplified by the exchange rate persistently falling despite rising interest rates.

This scenario would be expected to be temporary in nature and would not be all bad.

Banks would restrict credit growth as the economic outlook creates uncertainty around debt servicing capabilities

Interest rates rise as inflation pressures emerge.

Treasury says the low exchange rate would provide some offset for exporters, but this would be offset by higher interest rates and low global demand

“Stronger inflation is likely to put increased pressure on wages, and make it more difficult for departments to manage costs

“Unemployment (and unemployment expenditure) will rise following higher interest rates and muted economic activity

“However, high inflation is likely to improve the fiscal position in the short term, speeding up progress towards surplus and debt objectives.”

Though these scenarios were prepared in July, there has been nothing much to suggest that the overall situation has changed since then.