The Treasury is warning that economic growth this year might drop below 2 per cent. That would mean virtually zero in per capita terms.

The economy is running below potential - producing less than it could. The starkest evidence is that unemployment is headed back above 6 per cent.

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It never got below 5.5 per cent, even at the peak of the economic cycle last year, when demand was underpinned by the need to rebuild our second largest city, the most favourable terms of trade for 40 years and surging net immigration.

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The Government's debt levels are low by international standards, and these days it can borrow extremely cheaply.

So why has it made such a big deal about achieving a fiscal surplus - as it has, on schedule, the first since 2008 - and on meeting its target of reducing its net debt to 20 per cent of gross domestic product by 2020?

When asked on Wednesday what the merit was in running surpluses at this stage in the cycle, rather than providing some fiscal stimulus, Finance Minister Bill English said: "The merit in running this particular surplus is that it is a long way better than an $18 billion deficit".

That was a reference to the earthquake- and recession-swollen hole in the Government's accounts when it set the target four years ago.

"The point target was all about getting out of a hole in our books and the potential to get into a pretty nasty cycle of large deficits and debt which would be difficult to break out of," said English.

The surplus target had compelled the public service to focus on doing more with less and identifying the drivers of demand for public spending - the "social investment" approach English has made the hallmark of his stewardship.

"Now we are at this point and have got out of that hole, we have to look ahead at the kind of parameters that make sense in the kind of world we find ourselves in," he said. "Some are advocating that if growth is going to be low there should be more stimulus. "Certainly, in the past we would not have had that flexibility. We want to make sure that as we reframe our fiscal target, we take account of the kind of issues you raise."

[Unemployment] never got below 5.5 per cent, even at the peak of the economic cycle last year.

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The return to the black in the 2014/15 year that the Treasury reported this week is driven by the fact that the tax take was up 8.2 per cent on the year before, while operating expenditure rose only 1.7 per cent - or not at all in per capita terms.
Health spending, for example, rose 1 per cent in the latest year, to be the smallest share of GDP since 2008, at 6.3 per cent.

But that combination of strong revenue growth and minimal spending growth will prove hard to maintain as the economy slows.

Asked if he expected to run another surplus this year, English was non-committal.
He will not be able to rely on brisk growth in nominal gross domestic product - the combined effect of real growth and inflation, which is a proxy for the tax base.
The Government would have to adjust to the low inflation, lower growth environment it found itself in.

"We are going through a process of redoing the fiscal targets," said English.
This suggests December's Budget Policy Statement might be a more interesting document than the statements usually are.

And English was not ruling out the possibility of bringing forward to next year the tax cuts foreshadowed for 2017. The Government's preference would be to continue to run surpluses, he said, to deal with "the debt issue".

What debt issue?

After 14 years in which National- and Labour-led governments ran surpluses and repaid debt, net debt had fallen by June 2008 to $10 billion, or 5.5 per cent of GDP.

Since then it has risen to $60 billion or 25 per cent of GDP and has been there or thereabouts for three years.

That is low level by international standards.

The International Monetary Fund estimates in the annual Fiscal Monitor it published this month that even New Zealand's gross general government debt (a broader measure that includes local government and ignores offsetting liquid financial assets) is less than a third of the average among 36 advanced economies, relative to the size of the economy.

And the interest rates the Government has to pay are historically very low. Its $4.6 billion interest bill in the latest year was equivalent to 1.9 per cent of GDP, compared with 1.2 per cent in 2008 when debt levels were much lower.

English says that in today's uncertain international environment, reducing debt is prudent.

It is not only that the emerging market economies, led by China, are looking more fragile by the day.

The advanced economies as a group are growing at unimpressive rates (around 2 per cent, the IMF reckons) six years into recovery from the global financial crisis.

Countries (such as New Zealand) which are not fiscally constrained and which significantly rely on net external demand should ease their fiscal stance in the near term, especially through increased infrastructure investment.

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And they remain heavily medicated in terms of monetary policy.

The European Central Bank and Bank of Japan are printing money, and while the US Federal Reserve has at least stopped doing that, it is apparently in no rush even to start lifting interest rates from the emergency levels it cut them to during the crisis. Such heavy dosages of monetary stimulus carry serious side effects. They have inflated asset markets around the world, including the Auckland housing market.

The IMF warns that "The main medium-term risk for advanced economies is a further decline of already-low growth into near stagnation, particularly if global demand falters further as prospects weaken for emerging market and developing economies."

Countries (such as New Zealand) which are not fiscally constrained and which significantly rely on net external demand should ease their fiscal stance in the near term, especially through increased infrastructure investment, it says.

Fiscal conditions in New Zealand are likely to become more stimulatory regardless of any policy change, simply because of the "automatic stabilisers" as unemployment rises and revenue growth slows.

But the IMF is right to call for more than that.

It is a bit too easy for the Government to leave the task of moderating the cycle entirely to the Reserve Bank.

That task, never easy, is especially difficult in the current international environment, governor Graeme Wheeler said in a speech on Wednesday.

As the saying goes, monetary policy needs mates.