Brian Gaynor: Wishful thinking and not enough saving

The Government seems to be counting on the Rugby World Cup to be an economic lifesaver. Photo / APN

The problem with this week's Budget, and most of its predecessors, is that they are more fiction than fact as far as long-term forecasts are concerned.

They are more fiction than fact because finance ministers tend to gloss over current difficulties by predicting a rosy long-term future. Bill English was no exception on Thursday when he told Parliament "the Budget eliminates the deficit and achieves surplus by 2014-15, a year earlier than forecast in last year's Budget".

He went on to say: "As a result, the Government's need to raise debt will greatly diminish. This year we have raised an average of $380 million on net new debt every week. Next year that will fall by more than forecast in last year's Budget. And from 2014-15 on we will be repaying debt."

This sounds great but what are the chances of the Government achieving a surplus in the June 2015 year and to be reducing debt by that date?

The accompanying table shows the Government's obgal (operating balance before gains and losses) forecasts. The figures, which should be looked at from the bottom up, illustrate that the forecasts change dramatically from the initial predictions to the actual outcome.

This is demonstrated by the after:

In May 2006 the Treasury was forecasting a surplus of $2.9 billion for the June 2010 year but there was a deficit of $6.3 billion.

The previous Labour Government had an initial forecast of a $6 billion surplus for the June 2011 year. This was adjusted to an $8.6 billion deficit in last year's Budget and is now forecast to be a record $16.7 billion deficit.

The initial forecast for the 2011-12 year, also made by Helen Clark's government, was for a surplus of $3.5 billion but this is now expected to be a $9.7 billion deficit.

These deficits have a lingering impact on the Government and the country because the shortfalls have to be borrowed and this results in higher interest costs in subsequent years.

Politicians, particularly when they are in power, are extremely positive because they believe that their economic policies will be successful and lead to a much stronger fiscal position for the Government in the years ahead.

As a consequence their debt forecasts are also far too optimistic. For example, the Crown debt forecast for the June 2011 year has surged from $17.8 billion to $71.6 billion while the forecast for the June 2012 year has risen from $42.7 billion to $79.2 billion.

The National Government is predicting a small Budget surplus in 2014-15 even though total Crown operating expenses are forecast to grow by $13.1 billion between 2009-10 and 2014-15. The huge deficit is expected to be turned into a small surplus because Crown revenue is forecast to increase by a whopping $20.2 billion over the same period.

This revenue forecast is based on the assumption that the economy will take off with GDP growth expected to grow by 4 per cent in the March 2013 year, 3 per cent in 2014 and 2.7 per cent in 2015.

According to the Budget's fiscal strategy report, "The projected growth rate of 4 per cent to March 2013 would be the strongest since 2004. As a result, employment is forecast to increase by over 170,000 from the end of 2010 to June 2015 and the unemployment rate to fall to 4.5 per cent (from 6.6 per cent at present)."

The 170,000 additional jobs forecast is a key feature of the long-term obgal outlook because these people will move from welfare into jobs where they will pay tax and boost the GST take through additional spending.

The Treasury is forecasting a 27 per cent hike in income tax revenue over the next four years, a 40 per cent increase in the company tax take and a 40 per cent rise in GST receipts. These optimistic jobs and tax revenue forecasts have allowed English to avoid addressing the issue of Crown overspending and still predict a rosy outlook for the June 2015 year.

There are a number of reasons why the positive fiscal prediction for the June 2015 year is not expected to be achieved. These include:

It is highly doubtful that the economy will generate 170,000 new jobs over the next four years when it created only 82,500 extra jobs in the five years ended December 2010.

There is little vision in the Budget, its bullish GDP forecasts seem to be primarily based on two one-off events, the Rugby World Cup and Christchurch rebuild.

The Canterbury rebuild will probably cost more than expected because of rising construction and building costs.

The number of individuals in the 65 and over age group is expected to rise by 115,000, or from 13.2 per cent to 15.1 per cent of the population, over the next four years. This will put an increasing burden on the Crown in terms of National Superannuation and healthcare expenditure.

In view of these factors it would be a brave person who was willing to bet on the Government achieving a Budget surplus, and beginning to reduce debt, in the 2014-15 year.

The Government was a net saver until the June 2009 year as its revenue exceeded its expenditure while individuals were net borrowers because their expenditure exceeded their income. It is now the other way around with individuals saving and the Crown borrowing because of its Budget deficit.

The worst thing for the economy would be for individuals to stop saving yet the Key Government has hit the KiwiSaver scheme for the second time since it was elected in November 2008.

English announced total expenditure savings of $5.17 billion over the next five years with $2.61 billion or 50.5 per cent coming from KiwiSaver. This is a combination of a reduced member tax credit rate from $20 a week to $10 a week and a tax impost on the employer contribution.

This won't have a big impact on employees because the compulsory employer contribution will go from 2 per cent to 3 per cent in April 2013 but it will make a difference to the self-employed, those who run their own companies and homemakers. As a consequence KiwiSaver is now a lot less attractive for the rural economy and for stay-at-home women.

The issue here is that a number of politicians, including the Finance Minister, give the impression that they don't believe savings are important even though nearly every economic analysis of the country, both domestic and international, point out that this is a serious deterrent as far as the country's economic prospects are concerned.

This is reflected in MPs' comments that we shouldn't borrow to save indicating that all other government spending takes priority and savings incentives should only occur when all other expenditure programmes have been met.

Why do politicians argue that we are borrowing to save yet we seem to be sourcing National Superannuation and the extremely generous MPs' superannuation scheme from current revenue?

The concern is that the obgal forecasts for the 2014 and 2015 years are far too optimistic and the Government will be under increasing pressure to make further spending cuts. Savings schemes, particularly KiwiSaver and the New Zealand Superannuation Fund, seem to be the first target as far as this Government is concerned.

This is unfortunate because New Zealand's long-term prosperity is dependent on a higher savings rate and far greater investment in the country's productive or tradeable sector.

Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.

bgaynor@milfordasset.com