The government’s books are improving faster than expected with Treasury now forecasting a $4bn surplus a year earlier than predicted, but much of the improvement comes from inflation and bracket creep rather than a stronger economy, writes Henry Oliver in today’s excerpt from The Bulletin.
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Finance minister Nicola Willis hailed “healthy economic growth and a distinct improvement in the government’s books” as Treasury released its pre-election economic and fiscal update (Prefu) on Tuesday, RNZ’s Craig McCulloch reports.
The attention-grabbing number is a forecast surplus of around $4bn, up from the $2.5bn projected in May’s Budget and landing a year earlier than expected. The Government now intends to borrow $15bn less over the next four years.
Where the money comes from
So, good news, right? Well, yes. But also, no. The Post’s Tom Pullar-Strecker explains the mechanics: Core crown expenses are forecast to fall from 32.1% of GDP to 29.5% by June 2031, an outcome of cost cutting across most government agencies. At the same time, tax as a share of GDP is projected to rise from 27.6% to 29.1%.
This is where things get tricky. Treasury lists three drivers: inflation creating more “fiscal drag” (ie tax bracket creep, where rising incomes push people into higher tax brackets); businesses’ taxable income growing faster than the economy because things are so expensive which boosts company tax; and extra revenue from fuel excise duty and road user charges because petrol is so expensive. Together, an annual operating deficit of $10.bn is forecast to become an $8.9bn surplus.
So, as Pullar-Strecker puts it, “the improvement in the Government’s books owes little to a stronger real economy. Higher prices and incomes are doing much of the work, while spending is being held down as a share of GDP.”
The caveats
Treasury now expects slightly slower growth than it did in May (though 2.6% annually); unemployment and inflation are both forecast higher than previously predicted; and house price growth has been revised down to 11% from 18% by June 2030. ANZ senior economist Miles Workman described the forecasts as “on the rosy side,” The Post reports. Independent economist Cameron Bagrie was harsher, suggesting they counted the benefits but not the costs of inflation.
Treasury secretary Iain Rennie acknowledged that negative developments in the Middle East since the forecasts were finalised on August 21, along with the assumption oil prices will drop next year, meant growth was more likely to undershoot than exceed expectations. If that happened, he said, there would be flow-on effects for the fiscal forecasts.
Surplus before tax cuts
Speaking to the Herald’s Thomas Coughlan, Willis said fiscal consolidation – reliable surpluses and a falling debt curve – would come before any adjustments to income tax. “We cannot leave New Zealand vulnerable to the world with an extraordinary debt position,” she said. Once a surplus was achieved, “choices open up.” She said rewarding hard work through adjustments to tax thresholds was among the “values” behind her thinking, but delivering on National’s budget responsibility rules was the priority.
The balls!
On The Spinoff’s At Large with Toby Manhire, Bernard Hickey pointed to the irony at the heart of the Prefu: much of the improvement came from inflation, “the demon of everyone, including the government and voters.”
He took issue with Christopher Luxon’s framing on Newstalk ZB (“not many countries have got the balls to get their books back in order”) saying that “having the balls” also meant not building houses and leaving people treated in emergency department hallways.
Hickey also backed calls for an independent policy costing office to act as what he called a “video assistant referee in the political game,” pointing to the risk of another 2017-style “fiscal hole” fight.
On RNZ this morning, Jo Moir notes the Prefu landed after another tough poll for National, sitting at 28% alongside Labour. That gives National hard evidence for its economic pitch — but with the numbers this tight, and minor parties less able to assume the majors will tidy up their costings later, it’s unclear whose version of the books voters are really choosing. “There’s so little in it,” Moir writes, “it’s hard to know who would be leading what in any post-election chats.”
