KEY POINTS:
All the growth in the Treasury's December economic and fiscal update is in the wrong things - such as unemployment, fiscal deficits and Crown debt.
Since the pre-election opening of the books just 10 weeks ago the Treasury has more than halved its forecast of gross domestic product growth over the year to March 2010 from 1.8 to 0.8 per cent.
That would follow the scant 0.3 per cent now forecast for the year to next March. It reflects a view that we are less than a third of the way through a three-year stretch where consumer spending flatlines.
In addition, residential construction is forecast to shrink by another 11 per cent, on top of a fall twice that size in the current March year, and business investment is expected to contract by 15 per cent.
Consumption and investment by the Government sector provide a partial offset.
The Treasury forecasts, released yesterday,
estimate the cumulative fiscal boost to the economy over the two years to June 2010 will be just over 5 per cent of GDP or roughly $9 billion - every bit as dramatic, Finance Minister Bill English said, as other countries are doing.
The unemployment rate is expected to climb from 4.2 per cent now to 6.5 per cent by the middle of next year, representing 52,000 more people out of work.
Dismal as the latest forecasts are, they may still be optimistic, market economists said, as they reflect the state of the data a month ago and the international outlook, in particular, has worsened markedly since then.
The Treasury's central forecasts assume New Zealand's trading partners will manage growth of just 1.2 per cent next year.
While that is feeble by historic standards, it is twice that of the most recent consensus forecasts - which came out since the Treasury closed its books for the Defu (December economic and fiscal update).
The Treasury outlines an alternative, darker scenario which is predicated on trading partner growth of just 0.4 per cent, implying a steeper plunge in export commodity prices.
On this scenario unemployment rises to 7.5 per cent and nominal GDP - effectively the tax base - is $7 billion smaller in the coming year than under the central forecast, and about $5 billion a year smaller in the out years.
The effect on the debt outlook is dramatic. Gross Crown debt would rise from $31 billion now to $81 billion in 2013, and net debt from zero to $54 billion.
On the central scenario, gross debt rises from 18 per cent of GDP now to 33 per cent in 2013.
Looking further out, the Treasury has pencilled in projections for the fiscal outlook for the 10 years beyond that, assuming no policy changes.
These projections show gross debt climbing steadily to 57 per cent of GDP by 2023, which would take it back to the levels prevailing in the early 1990s.
It would reverse the legacy of a decade and a half of fiscal prudence, with consistent surpluses and debt falling when measured against the size of the economy.
English said that was was not going to be allowed to happen.
We will have to wait for his first Budget to learn what the Government plans to do about it.
It would take two things, neither of them easy, he said.
One is to improve the quality of government spending on a permanent basis, adding swiftly that this was not the time to slash and burn.
The other is to get the economy growing faster than the 2.5 per cent a year the Treasury reckons its trend growth rate is.
English does not expect a return to fiscal surpluses in the next three years.
"Maybe in the next [parliamentary] term," he said.
"I would expect to see us back in surplus in the third term and I'm willing to hang around long enough to make it happen."
Debt raising won't be easy, say experts
The Government's Debt Management Office will have its work cut out selling the bonds needed to fund burgeoning cash deficits over the next few years, economists warn.
Bond issuance is set to climb from the $2 billion to $2.5 billion range of recent years to $7.5 billion in 2009/10 and $15 billion in 2011/12.
"The DMO will have a huge job ahead in trying to sell this large issuance offshore, given that there is an insufficient domestic savings pool to absorb it," said ANZ National Bank chief economist Cameron Bagrie.
Bank of New Zealand head of research Stephen Toplis said it would mean interest rates higher than they otherwise would have been and the Government crowding out private sector borrowers.
"Questions are starting to be raised as to who will be willing to give the Government its requisite funding in an environment when authorities across the planet will be in heavy competition to fund their own fiscal excesses," Toplis said.
"Only time will tell but we are certain that at some point in the next year or two bond yields are going back up, savagely."
