Editorial: Prefu suggests we’re going back to the future

Editorial

EDITORIAL

There is a distinct sense of “back to the future” in the Treasury’s latest set of economic forecasts.

Higher-than-expected net migration is likely to prop up sluggish growth and prevent high mortgage rates from killing the property market.

The Treasury forecasts that in the year to September, New Zealand will gain a net 100,000 migrants - 33,000 more than it expected in May.

It sees a net 45,000 more people coming to the country over the next four years than it previously expected, with the annual net gain eventually falling to 40,000 people.

As for housing, the Treasury believes residential investment will be subdued in the near term, following a long period of high costs, higher interest rates and labour shortages.

It expects house prices to rise by 1.6 per cent in the year to June 2024, before eventually reaching 3.9 per cent growth in the year to June 2027.

While these levels are well below that which we’re used to, the Treasury in May saw the market making a slower recovery.

This dynamic of generating growth on the back of more people is exactly what the Labour-led Government has been trying to move away from over the past six years.

When in Opposition ahead of the 2017 election, Finance Minister Grant Robertson spoke of improving productivity to put an end to this unsustainable approach.

But here we are, back where we were six years ago - this time facing a raft of additional economic challenges.

Migrants add welcome skills, diversity, and vibrancy to our wee island nation.

But the kicker is that the Treasury doesn’t believe the influx of people (partly reflecting the release of pent-up demand from when travel was restricted) will improve our productivity.

It reckons more people will see the economy produce more overall. But per person, we will produce less over the next year.

It believes the demand that’ll be generated from migration will outweigh the supply boost to the labour market.

This will exacerbate inflation and see interest rates remain higher for longer.

The issue is, we are already living beyond our means.

The Government is spending more than it’s receiving, households are in a lot of debt, and as a country, we’re importing record amounts more than we’re exporting.

Sure, our government debt isn’t as high as other countries’, but it’s the combination of high public and private debt and a deep current account deficit that’s the concern.

We need to sustainably grow our economy, so the Government receives enough tax revenue to plug our infrastructure deficit and prepare for the costs that await as our population ages.

We need to incentivise investment in businesses, not just property, to ensure we have stuff to export.

It’s the same old story; the same stuff we’ve been talking about for years.

The difference now compared to, say, six years ago, is that the economy is at capacity. Employment and inflation are high.

The Reserve Bank can’t slash interest rates, and the Government can’t borrow excessive amounts to try to stimulate growth.

We need to upskill and invest in infrastructure and technology to do more with what we have.

It is much easier said than done, but improved productivity is New Zealand’s only way out of this fiscal rut.