Pre-election Economic and Fiscal Update – economy “better than predicted”

The Pre-election Economic and Fiscal Update has been released today. Minister of Finance Grant Robertson’s take on it:

  • PREFU shows economy doing better than forecast
  • Unemployment to peak at 7.8%, down from 9.8% forecast in the Budget
  • Year-to-June accounts show tax revenue, debt and OBEGAL better than forecast
  • Global forecast downgraded as COVID-19 second waves and uncertainty grows
  • Balanced plan to support critical public services, manage debt and reduce the deficit caused by COVID-19

The Pre-election Economic and Fiscal Update released today shows that the near-term economic recovery has been stronger than the Treasury and many economists predicted at the May Budget, as the economy bounced back strongly out of lockdown.

“The Treasury now forecasts the unemployment rate to peak at 7.8%, down from 9.8% forecast in the Budget, because the economy is stronger than expected. That compares to an expected peak of 10% in Australia, while countries like the US and Canada have already recorded unemployment peaks above 13%,” Finance Minister Grant Robertson said.

“The unaudited Crown accounts for the year to 30 June 2020 back up the evidence of a rebounding economy, with core Crown tax revenue of $84.9 billion coming in higher than the $82.3 billion forecast, indicating more activity than expected.

“Net core Crown debt was 27.6% of GDP at 30 June, compared to the Budget forecast of 30.2%, and the OBEGAL deficit of 7.7% of GDP at 30 June was lower than the 9.6% forecast.

“These are signs that the New Zealand economy is robust, and that our plan to eliminate COVID-19 and open up the economy faster is the right approach. We can see this in the forecasts, with the New Zealand economy predicted by the Treasury to grow by an average of 4.2% across 2021 and 2022, compared to Australia at 3.6% and the US at 3.5%.

“The Treasury – similar to other economists – initially forecast June quarter GDP to fall by about 23.5% in June from March. In today’s forecasts, the Treasury has reduced that to 16%. All this goes to show is that forecasting month-to-month, let alone years in the future, is incredibly difficult with such an uncertain global environment and an unpredictable virus.

“However, global headwinds and this 1-in-100 year economic shock caused by COVID-19 will have a long-term effect on the Government’s books.

“The forecasts illustrate our balanced plan to manage debt and reduce the deficit caused by COVID-19, while protecting our investment in services like health and education.

“COVID-19 is hurting economies around the world but because New Zealand went into this with low debt and a growing economy, we will come out better than other advanced countries,” Grant Robertson said.

“Policies like the Wage Subsidy, business tax refunds and small business cashflow loans protected jobs and kept businesses going. We’ve also invested to secure PPE and ventilators, and make sure our testing and contact tracing systems are world-class. Taking on debt to fund this response is the right thing to do as we fight COVID-19.

“There is no free lunch here.These measures require significant investment. It has been necessary to use the Government’s strong financial position to do this.

“What counts is our strong track record. Before COVID-19, despite constant urging to the contrary we stayed disciplined with our spending and reduced debt below 20% of GDP while successfully investing in critical public services.

“Our strong starting position that means even at its peak of around 56%, New Zealand’s net debt will be considerably lower than other economies around the world – advanced economies went into COVID-19 with net debt averaging about 80% of GDP.

“The PREFU’s long-term projection model shows debt reducing to 48% of GDP by the end of the projection period. The difference between debt of 56% and 48% at the end of the projection period represents $46 billion less debt than if debt just remained at its peak.

“The projections show the deficit caused by COVID-19 reduces steadily each year from 10.5% of GDP this year, to less than 1% of GDP by June 2028.

“The PREFU also shows the benefit of locking in low interest rates for the long-term debt that has been used to fund the response, with annual core Crown finance costs forecast to reduce by around $800 million over the next four years.

“Because the Government can borrow for 20 years or longer at rates below 1%, it makes sense to lock these in now to fund the response before interest rates rise. Because the Treasury has already been able to secure more funding at lower rates, and because the Government’s cash position has improved since the Budget, the Treasury today announced it has reduced its debt programme over the next four years by $10 billion.

“There are challenges ahead, but we have a five point plan to grow the economy, support businesses and seize the opportunities created by our world-leading COVID response.”

While the economy may not be as bad as predicted the effects could have been delayed and may be yet to bite. Or not.

NZ First response to PREFU

Winston Peters with NZ First’s response to the Pre-election Fiscal Update:

Rosy Glow On The Economy Is A Sham

Today’s Treasury forecast puts a rosy and reassuring glow over New Zealand’s economic outlook – as you would expect.

“Look a little deeper and the gloss evaporates,” says New Zealand First Leader and Northland MP Rt Hon Winston Peters.

“Let’s start with what is not in it – namely National’s $10.5 billion ‘Roads of National Significance,’ the $1.2 billion for Dunedin’s new hospital or the hundreds of millions for $18 doctor visits and Auckland commuter rail.

“That’s a $12.3 billion hole of unfunded expenditure that has not been past Cabinet so is not in this Pre-Budget Economic and Fiscal Update.

“In relation to New Zealand’s Achilles heel, the balance of payments deficit, there are no grounds for comfort with permanent deficits locked in due to this immigration-led import obsessed government.

“Messrs English, Joyce and Bridges have predicted doom should migration settings be touched but Treasury obviously did not get the memo. Treasury vindicates New Zealand’s First’s immigration policy.

“Treasury forecasts no economic repercussions with its migration forecast of 20,000 by 2021 and 15,000 by 2022.  This confirms New Zealand First’s view that net foreign migration of around its target 10,000 a year is completely sustainable for our economy.

“There are also some huge bills not included in this document. For example, Auckland’s $6 billion transport black hole, health funding not keeping pace with population growth and many unfunded policy commitments.

“How reliable are Treasury forecasts when a desperate government is raiding the NZ Superannuation Fund for upwards of a billion dollars each year in tax? Not much.  Money that should invested to grow the Fund is being diverted to pay for National’s promises.

“Given the risks in the global system the Budget Economic and Fiscal Update provides no contingency for any shock – natural or in the global financial system.  It is clear the economic cupboard is empty aside from migration and consumption.

“The Treasury forecast shows that underneath the bonnet this economy is barely growing above 1 per cent annually.”

Peters also talked about it in his speech to the BusinessNZ Election Conference yesterday:

SPEECH: “Putting the New Zealand economy first”

Green response to PREFU

A media release from Green leader James Shaw after the release of the PREFU:

Bigger surplus means we can end poverty, clean up our rivers, and tackle climate change

A bigger surplus will allow a new government to manage the economy responsibly while making the changes people know are needed, like lifting kids out of poverty, cleaning up our rivers, solving the housing crisis, and tackling climate change, the Green Party said today.

The Pre-Election Fiscal Update (PREFU) released today shows stronger growth in the short term, resulting in a higher than forecast surplus for the government this year by $2.1 billion. However, forecast productivity growth remains weak and will undermine our longer term economic prospects, resulting in lower long-term growth.

“It’s clear now after the opening of the books that there is more money available in the short term, and we’ll be taking a good look at the best way to invest that in our priorities of ending poverty, cleaning up our rivers, and tackling climate change,” said Green Party Co-leader James Shaw.

“We can manage the economy responsibly and use the bigger surplus to improve the lives of New Zealanders by building more homes, lifting incomes, and providing free public transport for young people.

“Further tax cuts from National, before they’ve even restarted payments to the New Zealand Superannuation Fund, would smack of desperation and highlight how they’re more interested in staying in power rather than managing the economy for the long term.

“We will deliver modest tax cuts for everyone earning less than $150,000, as part of our family incomes package, lifting hundreds of thousands of kids out of poverty, and making everyone who earns less than $150,000 better off than they are now.

“Free buses and trains, including school buses for kids and teenagers, will make a much bigger difference to family budgets than another tax cut.

“Free public transport would save some families hundreds of dollars a week while addressing high levels of congestion on our roads.

“After nine years, National have gone stale and are unwilling to make the changes people know are needed, like lifting kids out of poverty, cleaning up our rivers, building more homes, and tackling climate change.

“No child should go to school hungry, especially when times are good. We’re going to fix that,” said Mr Shaw.

Labour’s reaction to PREFU

I can’t find any official response from Labour after the release of the Pre-election Fiscal Update, but Jacinda Ardern has been talking to media.

NZH: Labour can still pay for policies despite softer economic outlook, Ardern says

The Labour Party is promising that it can still follow through on its core health, housing and education plans despite new forecasts showing the next Government will have less cash to spend than first thought.

Labour leader Jacinda Ardern said yesterday that her party could carry out its agenda without borrowing more money and without raising income tax, including the top tax rate – something which it had left the door open to but has now ruled out.

After becoming leader, Ardern said she wanted to put more emphasis on investing in health, social and education investment – though not all of these would require more funding.

Ardern said this was still affordable because her party would scrap National’s $2 billion tax cuts and bring down debt two years later than National’s target of 2021.

“Certainty there was some anticipation that [the surpluses] would be better, but that does not interrupt our plans.”

Despite the softer economic outlook, Ardern would still not rule out bringing forward the party’s free tertiary education policy, which would not be fully implemented until 2025.

Audrey Young: Jacinda Ardern moves swiftly to deny National more tax attacks

When it comes to tax, Labour’s new leader Jacinda Ardern has been relentlessly uncertain.

But very transparent in her uncertainty. She has not answered a question about a possible capital gains tax without emphasising how transparent she is being about not being able to give definitive answers.

She is honestly saying she doesn’t know if there would be a capital gains tax under a Labour Government, how much it would be, whether it would apply to small businesses, farms, and artwork, second properties, or whether there would be one at all.

“People deserve to know our direction of travel,” is how Ardern understated it to the Business New Zealand election conference.

Perhaps realising that that version of transparency was wearing a little thin, Ardern seized upon the statutory pre-election opening of the books (Prefu) to give a definitive answer about introducing a new top tax rate. No, she said within three hours of the books being opened.

Ardern stated that Labour would not include a top tax rate increase in their terms of reference for their proposed expert working group on tax. She also ruled out any increase to GST.

She has already said that a Capital Gains Tax on family homes would also be excluded from consideration.

This seems to mean that Labour will listen to tax experts after the election, but only to what they want to hear.

But there could be more on this, Labour have said they want to take time to go over the PREFU before releasing their final tax policy.

National’s response to PREFU

The National Party’s response to the Pre-election Fiscal Update:

The National Party will commit to implementing a further Family Incomes Package in the next term of government, subject to certain fiscal conditions being met.

“Our strong economy means the Budget 2017 Family Incomes Package will provide a positive boost to after-tax family incomes on 1 April of next year,” Finance Spokesperson Steven Joyce says.

“We are committed to delivering more for New Zealand families in the next term of government, subject to maintaining our strong plan which is allowing New Zealand companies to compete and succeed on the world stage.”

“The best indications from today’s PREFU announcement is that a similar sized Family Incomes Package to the current one would be possible from 2020, unless the economy performs better than expected,” Mr Joyce says.

The first Family Incomes Package will deliver an average of $26 a week to 1.34 million working families from 1 April 2018 through a combination of tax threshold changes, increases in Working for Families tax credits, and increases in the Accommodation Supplement. The Package will also provide an additional $13 a week per couple for 750,000 superannuitants.

Mr Joyce laid out a number of key conditions to be met for a second Family Incomes Package to proceed. These are:

  • Maintaining the Government’s debt targets of reducing net debt to 20 per cent of GDP by 2020 and 10-15 per cent of GDP by 2025
  • Meeting the Government’s spending commitments and forecasts for building infrastructure and improving public services laid out in Budget 2017
  • Funding any Family Incomes Package from cash surpluses and not from additional borrowings

The Pre-election Fiscal Update showed that cash surpluses beyond current and future budget spending commitments would commence from the 2020 financial year.

Mr Joyce says that a second Family Incomes Package would have a similar emphasis to the first package that commences 1 April next year.

“We would want to focus particularly on lifting the incomes of low to middle income families, look to simplify further the tax and transfer system so people can more easily see the link between their work and their earnings, and continue to lift the lower tax thresholds as incomes grow,” Mr Joyce says.

“The average wage is predicted to grow from $58,900 at March 2017 to $65,700 over the next four years. It is very important that we aren’t taxing middle income earners at 30 cents in the dollar. ”

“National has shown it can lift incomes and invest in public services and infrastructure. Under our responsible programme we can continue to do both.”

Mr Joyce said that the ability to have an ongoing conversation about boosting family incomes is only possible because of New Zealand’s strong and growing economy.

“Whether it’s investing in better public services, investing in infrastructure, or boosting family incomes, every budget initiative is only possible because our small and medium-sized businesses operate in an economy that allows them to compete successfully on the world stage.

“It’s crucially important that keep encouraging them to compete and succeed and not weigh them down with poorly thought through new taxes and polices that would stall the economy and stunt growth,” Mr Joyce says.

Pre-Election Fiscal Update 2017

Media release from Minister of Finance Steven Joyce on the PREFU.

A slightly softer growth forecast is the main feature of largely unchanged Pre-election Fiscal Update compared to the Budget forecasts three months ago, Finance Minister Steven Joyce says.

“The softer growth New Zealand has experienced in the six months to March flows through to a lower starting point in the 2017/2018 year,” Mr Joyce says.

“The net effect is that growth is slightly lower through the forecast period – averaging 3.0 per cent over the next four years rather than the 3.1 per cent predicted in the Budget.

“The other notable change is that Treasury expects the labour market to be tighter over the next four years, with lower unemployment and stronger nominal and real wage growth.

“Treasury forecasts unemployment to drop to 4.3 per cent by June 2020 and for the average annual wage to increase from $58,900 at March 2017 to $65,700 by 2021, a $1300 per annum improvement on the Budget forecast.”

Other changes to the forecasts include:

A smaller balance of payments deficit across the forecast horizon
Lower CPI inflation, especially in the 2017/18 year
Net government debt falling below 20 per cent of GDP in the 2020/21 year. New Zealand Superannuation Fund contributions remain scheduled to resume in that year.
Most other elements of the forecast remain very similar to budget predictions, with nominal GDP, migration levels and budget surpluses largely unchanged, although the timing of budget surpluses has changed.

“The Budget surplus is expected to be $2.1 billion higher in the year just finished,” Mr Joyce says. “However Treasury expects the lower growth forecast to result in surpluses that are $1.8 billion lower over the next four years. The net effect is about even.

“The Government’s strong fiscal management means that New Zealand is one of the few OECD countries to be posting fiscal surpluses. This hard-won position is underpinning the Government’s strong economic plan which is delivering jobs and steady real wage growth for New Zealanders.”

The large infrastructure spend committed to in Budget 2017 means that residual cash remains broadly in balance until the 2019/20 financial year.

“There is limited room for any additional expenditure beyond what is already proposed in these forecasts until the 2020 financial year when there is expected to be a $1.7 billion cash surplus.  Anything significant in the meantime would involve more borrowing or raising additional tax revenues,” Mr Joyce says.

The PREFU forecasts include the following budget spending commitments:

  • $7 billion in additional operating expenditure over four years in Budget 2017 which commenced on 1 July 2017.
  • $1.7 billion per annum ($6.8 billion over four years) operating allowance to be allocated for Budget 2018, increasing by 2 per cent each subsequent budget.
  • $32.5 billion in total capital infrastructure investment between 1 July 2018 and 30 June 2021.
  • $6.5 billion over four years ($2 billion per annum in out years) for the         Government’s Family Incomes package commencing on 1 April 2018.

“Government annual operating expenditure in these forecasts increases from $77 billion to $90 billion over the next four years, which is sufficient for significant ongoing improvement in the provision of public services,” Mr Joyce says.

Election 2017 – PREFU day

With one month until the 2017 election today is the day the Pre-Election Economic and Fiscal Update (PREFU) comes out.

This will signal the amount of money available for more election promises, policies and bribes.

It is likely to accentuate the ‘tax cut’ versus ‘more taxes’ argument that looks set to differentiate National and Labour.

National will sharpen their pencil to try to attract (aka buy) some votes.

Labour will need to sharpen their presentation of their taxing and spending policy package. They have already signalled increases in both but will need to provide more specifics.

NZ First and Greens already want to spend far more than is ever likely to be available.

Stuff  Live: Opening the books, housing