Population forecast will mean higher interest rates

This week's Budget was notable for its carefully telegraphed surpluses and the relatively moderate election sweeteners included in its slightly looser fiscal outlook.

The Government can credibly argue it is not pushing down too hard on the accelerator of the economy, so the Reserve Bank won't have to tap any harder on the interest-rate brake over the next year.

But buried in the mountain of Treasury papers this year was an elephant of a forecast that could shift the political and economic landscape of the country if it happened.

Treasury likes to paint upside and downside scenarios into its forecasts to keep economy-watchers on their toes. This week's upside — that annual net migration could surge to 41,500 by the end of this year — was a doozy.


That's the equivalent of almost 1 per cent of New Zealand's population and just under the May 2003 record high of 42,500.

The Treasury's central forecast was that annual net migration would rise to 38,000 in the September quarter of this year from 31,900 in the March quarter, and from nil net migration as recently as early 2012.

So the Treasury's upside scenario is that in the next six to nine months net migration will be only 3500 over its central forecast.

But the impact will be massive. Treasury forecasts that private consumption growth will spurt to 5.3 per cent from its main forecast of 4.2 per cent. The extra migration would drive employment up and unemployment down to almost 4 per cent by 2018.

That sounds fantastic, but there's a downside. "With the economy already growing faster than potential, the further boost to domestic demand sees any spare capacity in the economy used up more quickly than in the main forecast," Treasury said.

That is code for inflationary pressure and higher interest rates. It forecasts short-term interest rates would jump by a full one percentage point more than already forecast to almost 6 per cent by early 2016.

That would see floating mortgage rates hit 9 per cent and the current account deficit would jump to 6.8 per cent from 6.3 per cent.

There is good news for the Government's budget, though, as the income created by the extra workers would increase taxes from wages, GST and profits. Higher interest rates also help the Government through higher taxes on term deposits. All this would increase the budget surplus for 2014/15 by almost $1 billion.

All this feeds into a growing political and economic debate around migration. It used to be seen as an unalloyed positive for the economy that boosted economic activity, entrepreneurial vigour and social diversity.

But there are economic downsides, too, including a surge in house prices and increased pressure on resources when the economy is running hot.

This is, of course, mostly an Auckland story and is set to become an election issue.

Labour has already raised the idea of limits on migration to help the Reserve Bank control interest rates and house-price inflation.

New Zealand First leader Winston Peters has a wider objection that he looks set to wave about with bells on in the lead-up to the September 20 election.

The irony will not be lost on Peters. The last time net migration was this high was around the July 2002 election, when NZ First campaigned hard against migration and got more than 10 per cent of the vote and 13 seats in Parliament.

There may be an elephant in the forecast, but there's now also a frisky old war horse hot on the trail to September 20.