Fiscal fight continued

Steven Joyce continues to push Minister of Finance Grant Robertson on expected net debt in relation to Labour’s pre-election fiscal plan. Joyce had been widely criticised for suggesting their was an eleven billion dollar hole in the plan. Robertson was adamant Labour’s plan was sound and accused Joyce was scaremongering.

Yesterday from Stuff: Economists see Government debt rising billions more than Labour’s plan

In Opposition Labour laid out a fiscal plan which would borrow around $11 billion more than National had proposed, but still cut debt as a share of the total economic output from 24 per cent to 20 per cent by 2022.

The plan formed a major point of contention during the election campaign, as National finance spokesman Steven Joyce was widely mocked for his claim that Robertson’s plan had a major “fiscal hole”.

But bank economists, who monitor the likely issuance of government bonds, are warning of pressure for Treasury to borrow billions more than Labour had signalled because of new spending promises.

The fiscal situation continually changes, but there was always a likelihood that spending would increase due to coalition bargaining.

ANZ chief economist Cameron Bagrie

ANZ has forecast that Labour will borrow $13 billion more than Treasury’s pre-election fiscal update maintained the former Government would over the next four years, although around $3b of that would go to the NZ Super Fund. This would see net Crown debt at 23 per cent of gross domestic product, 3 percentage points higher than Labour’s plan.

Outgoing ANZ chief economist Cameron Bagrie said the estimates for new spending were “conservative”, including an assumption that the new $1b a year regional development fund would come entirely from existing budgets.

“[S]pending pressures are all headed one way – and a lot depends on the economy holding up.”

BNZ senior economist Craig Ebert

BNZ has also indicated it expects borrowing to be stronger than Labour had flagged. Strategist Jason Wong said the half year economic and fiscal update would probably show “in the order of” an additional $2b-$3b a year in bond issuance in the coming years.

BNZ senior economist Craig Ebert said the figures were hard to determine so early in the term, but borrowing “could amount to a number of billion dollars” more than Labour had outlined.

“Some of this is taking place in a little bit of a vacuum still, because we’ve heard a lot of policies but it’s still a little unclear which ones have been confirmed confirmed, as opposed to just strongly proposed,” Ebert said.

ASB chief economist Nick Tuffley

However ASB chief economist Nick Tuffley now forecasts that unemployment will eventually fall to 3.9 per cent by 2021, while wage growth would gradually rise to 2.8 per cent by early 2020, on the back of both lower migration and plans to hike the minimum wage to $20 an hour by 2021.

Tuffley said based on its forecasts, and the assumption that Labour was able to stick to its spending plans, ASB was forecasting borrowing would be $1b higher than Robertson had signalled.

“Any slippage in [spending plans] will mean more debt issuance,” Tuffley said.

Joyce questioned Robertson about that in in Question Time yesterday, joining a patsy (question 1):

Tamati Coffey: What objective does the Minister have for core Crown net debt?

Hon GRANT ROBERTSON: As indicated during the Speech from the Throne, the Government is committed to reducing net debt to 20 percent of GDP within five years. Progress towards this will be set out by the Government during the usual Budget reporting cycle to the House, starting with the Half Year Economic and Fiscal Update, before Christmas.

Hon Steven Joyce: Has he seen amongst those reports the economic forecast from ANZ chief economist, Cameron Bagrie, who calculates that the Minister , in fact, won’t be able to meet his own Budget responsibility rule No. 2, to keep net debt below 20 percent of GDP, even with some rather heroic spending assumptions?

Hon GRANT ROBERTSON: I have seen those reports and I disagree with them.

Then in question 3:

Transcript (slightly edited):


3. Hon STEVEN JOYCE (National) to the Minister of Finance: Can he confirm core Crown net debt was $59.5 billion at 30 June 2017, and that it is his intention as Minister of Finance to increase net debt to $67.6 billion by 2022, as laid out in Labour’s pre-election fiscal plan?

Hon GRANT ROBERTSON (Minister of Finance): I can confirm that at 30 June 2017 net core Crown debt was $59.48 billion. I can further confirm that it is this Government’s policy to reduce net core Crown debt to 20 percent of GDP within five years. As the member knows, the exact dollar amount of debt in each year will be determined by the Budget process.

Hon Steven Joyce: I raise a point of order, Mr Speaker. That was a question written down on notice, and I don’t believe the Minister of Finance answered the second part of the question. He talked about something about 20 percent of GDP, but he didn’t actually answer yes or no to whether it was his intention to increase net debt to $67.6 billion by 2022.

Hon GRANT ROBERTSON: Speaking to the point of order, I’m not sure if the member heard the last part of my answer, where I did specifically address the question of what the exact dollar amount might be.

Hon Steven Joyce: He didn’t answer the question. Nobody is any the wiser as to whether, actually, he will allow net debt to get to $67.6 billion by 2022, as laid out in Labour’s pre-election fiscal plan.

Mr SPEAKER: Well, Speakers’ rulings are pretty clear in this area. I think somewhere around page 171 is the ruling that members cannot demand a yes/no answer, and I’m just about confident enough that the former Minister of Finance understands that these figures might be affected by growth figures.

Hon Steven Joyce: Sorry to prolong things, Mr Speaker, but actually it is possible to say whether it will be higher or lower or about that figure. It is a question on notice—it’s not a supplementary question—and I do think that the Minister of Finance could be a bit more specific as to that number, given that prior to a certain date in September he was actually accusing people of showing an affront to democracy for—

Mr SPEAKER: OK—[Interruption] All right, OK. I think where I’m going to leave it is that I might be slightly more liberal, as long as they are direct, on the supplementaries, if the member wants to drill down that way.

Hon Steven Joyce: Can the finance Minister confirm that the pre-election fiscal update forecasts net debt to reduce to $56.2 billion by 2022, meaning that his forecast of $67.6 billion is over $11 billion higher than in the pre-election fiscal update?

Hon GRANT ROBERTSON: I can confirm that those were the numbers in the pre-election fiscal update. What we have discovered is that those numbers did not take account of the need for increased spending in education capital expenditure, health capital expenditure, or a range of other areas.

Hon Steven Joyce: Is the Minister then saying that, actually, he expects to increase debt significantly higher than $67.6 billion because of his concerns about the matters he raised in the previous answer?

Hon GRANT ROBERTSON: The commitment of this Government has been that we will reduce net core Crown debt to 20 percent of GDP. The member well knows, from having prepared a Budget himself and being beside someone else who’s prepared Budgets, that the exact dollar figures for debt are never decided until later in the Budget process.

Hon Steven Joyce: Why doesn’t he agree with the ANZ analysis of 7 November that concludes net debt will be billions of dollars higher than he has forecast, and that he will breach his own Budget responsibility rule number 2 to reduce net debt to 20 percent of GDP within five years, particularly as he’s just told the House—

Mr SPEAKER: Order! The member’s finished his question.

Hon GRANT ROBERTSON: Because nothing that I have seen, in terms of the advice I’ve got to this point, would point to that, and because this Government is committed to reducing debt as a percentage of GDP—20 percent—within five years of taking office.

Hon Steven Joyce: If he doesn’t like the ANZ’s commentary, does he agree with the comments from the Bank of New Zealand on Monday, who stated that Labour’s election campaign budget was just too tight to be credible; if not, what does he think the BNZ has got wrong?

Hon GRANT ROBERTSON: What this Government has committed to is a set of Budget responsibility rules, and we will work within those. We made commitments before the election to address the social deficits in health, in education, and in infrastructure, and we will do that. I make no apology for having a slower debt track than that Government if it means that we build affordable houses, contribute to superannuation, and invest in our regions.

Hon Steven Joyce: Just to be clear, does he commit to meeting all the Government’s promises, including those in his coalition agreement and his agreement for confidence and supply with the Green Party, and also the Speech from the Throne, while increasing net debt by only $11 billion, from what it was going to be, over the next five years?

Hon GRANT ROBERTSON: I absolutely stand by those Government commitments and the Budget responsibility rules that we have put forward.

Hon Steven Joyce: Does he commit to meeting all the Government’s promises, including those in those coalition agreements from the Speech from the Throne, not in relation to a percentage of GDP but by increasing net debt by no more than $11 billion relative to the pre-election fiscal update over the next five years? A very specific question.

Hon GRANT ROBERTSON: The final exact dollar figures, as the member well knows from the Budgets he’s been involved in, will be decided later in the Budget process, but we remain 100 percent committed to our goal of reducing net debt to 20 percent of GDP within five years.


No doubt there will be continuing questioning on Government spending and deficits.

Politics and reality on the manufacturing inquiry

Excellent commentary on the opposition’s manufacturing inquiry, but not from the Mike Smith at The Standard in his post – Minister Tin-Ears – he’s an employee in David Shearer’s office so unsurprisingly is attacking National and promoting standard Labour lines:

New Zealand’s remaining world-class manufacturers are sick of being told by politicians that they need to work harder when they have been doing that for years, but face a huge headwind from an over-valued dollar.

We can only hope that National’s lack of action or ideas does not do too much more damage to the productive economy before then.

Trying to dutifully reinforce the idea that National runs a ‘do nothing’ government. But this ignores the reality – the exchange rate is mainly governed by international financial influences and there is little we can do about it in New Zealand.

Nick Tuffley (chief economist at ASB) has just spoken about it on Firstline.

The challenge with monetary policy is there is very little the Reserve Bank can do.

I don’t think there’s a free lunch.

We need to fix the UK, fix Europe, fix the US, and then we might have a lower currency.

By far the best at The Standard came from down the thread in a comment by ‘Tiresias’, who spells out the reality

There ain’t nutt’n no Government can do about the exchange rate, unless it’s prepared to sacrifice almost everything else on that altar.

And even if the Government could do something about the exchange rate it would have to think very carefully before doing it. Government debt isn’t frighteningly high. Private debt in New Zealand is. Most of it is via the banks and therefore funded from overseas in the almighty dollar.

Bring the NZ dollar down by 10% (at least, as you’d have to in order to make a difference) and you’ve increased NZ’s overseas debt by 10% overnight and that would have Standard & Poors, Moodies et al running flags up flag-poles left, right and centre.

So why is the opposition having a parliamentary inquiry on this? It’s hard to see it as anything but political grandstanding.

Full comment by Tiresias:

“I am optimistic that the Enquiry will produce some action no later than 2014.” – Mike Smith

I fear I’m not. Much as I loath this present Government I have to say that if there was a magic wand that could be waved to help exporters and manufacturers, Key et al would be waving it furiously. After all the MDs and CEOs and Directors of these businesses are National’s through and through, and I’m sure they’ve been demanding something for their money from the Government privately at parties and golf-courses and business breakfasts since before the last election.

The only way you’re going to bring the exchange rate down is to sabotage the economy so it looks as shaky as Spain’s or Italy’s. The Reserve Bank Governor set it out in a speech last October:

“So there are clear limits to what monetary policy and exchange rate intervention can do to lower the New Zealand dollar. In order to achieve a sustained reduction in the New Zealand dollar it would be necessary to alter the overall level and pattern of saving and investment in the economy. In particular, it will be necessary to tackle our addiction of depending on foreign savings to finance our consumption and investment. This dependency means that we have persistently needed interest rates above those in most developed economies to maintain inflation at target levels similar to those being followed elsewhere. Policies that increase domestic savings, including reducing the government’s fiscal deficit, and to reduce the flow of resources into the public sector and other non-tradables sectors, would help to achieve a sustainable reduction in the exchange rate.”

“http://www.rbnz.govt.nz/speeches/5005204.html”

Trouble is, to increase domestic savings you have to increase interest rates which puts up mortgates, both of which dries up High Street consumption which may help exporters but hurts all the rest of New Zealand’s businesses and retailers. Also, New Zealand’s Government fiscal deficit isn’t all that bad compared with the countries in trouble. It’s private sector overseas debt that’s causing the concern in the ratings agencies and the Govt. can’t do much about that except ask businesses to stop borrowing:

union.org.nz/sites/union.org.nz/files/Working%20Through%20the%20Issues%20-%20Debt%20(Revised).pdf

Plus “reducing the Government’s fiscal deficit &tc” is banker-speak for austerity which is just Graeme Wheeler toeing the official line.

Politicians – including Shearer in his State of the Nation speech – dream big dreams of other people coming up with better mouse-traps that are going to take the world by storm. Well, it might happen just as I might win Lotto. (Actually I’ll never win Lotto as I don’t buy a ticket, so make that “just as you might win Lotto”.)

There ain’t nutt’n no Government can do about the exchange rate, unless it’s prepared to sacrifice almost everything else on that altar. And even if the Government could do something about the exchange rate it would have to think very carefully before doing it. Government debt isn’t frighteningly high. Private debt in New Zealand is. (see union.org.nz above). Most of it is via the banks and therefore funded from overseas in the almighty dollar. Bring the NZ dollar down by 10% (at least, as you’d have to in order to make a difference) and you’ve increased NZ’s overseas debt by 10% overnight and that would have Standard & Poors, Moodies et al running flags up flag-poles left, right and centre.

So are you going to subsidise New Zealand’s world-class manufacturers just like you didn’t support New Zealand’s world-class wind-turbine manufacturer Windflow in Christchurch so that it’s had to lay off most of its staff – including world-class engineers and designers – and is now looking to sell its world-leading, New Zealand developed technology to a foreign competitor for a mess of pottage? http://www.nbr.co.nz/article/windflow-dream-fades-shares-plunge-ch-96636

Sorry Mike. All the hot air your inquiry will produce over the next few months might have generated a few kw electricity from a Windflow gen set had there been one available – but for the rest it’s just another charade of politicians forming a committee to look at all the ways you might get other people to reshuffle the deckchairs on the Titanic.

Yes, it is difficult to see the inquiry producing anything but hot air.

The inquiry seems to be a futile exercise that may do little more than give manufacturers false hope and waste their time.