When the Treasury did its pre-election opening of the books on Wednesday, not so much as a lolly wrapper fell out.

The financial performance for the June year just passed was stronger than expected - $1 billion more tax and a $2.1b higher surplus - but the Treasury does not expect that to persist.

The forecast surplus for the year just begun is unchanged in the Pre-election Economic and Fiscal Update, and for the following three years it has been revised down by a cumulative $1.8b. That reflects a weaker starting point in economic activity and a more conservative outlook for residential investment because of capacity constraints.

So Finance Minister Steven Joyce cautions that a second families income package - to follow the one announced in the May Budget and due to kick in next April, and which is factored into the forecasts - will have to wait until 2020, unless the economy performs significantly better than the Treasury currently expects. And its forecast for GDP growth, especially 3.7 per cent for the 2018-19 year, is towards the high end of market economists' picks.


Joyce repeated his Budget-day message that the forecast operating surpluses (excluding valuation gains and losses) are earmarked for a lift in capital expenditure on infrastructure. Not all of that has yet been allocated to particular projects.

He is not interested, he said, in borrowing to fund further tax relief beyond that already pledged in his May Budget - most of which Labour would allocate to increase public spending instead.

The Budget, and this update, incorporate an operating allowance, or provision for as-yet unallocated spending or tax cuts - a cumulative $17b or so over the next four Budgets.

Labour's alternative Budget has a significantly higher spending track, roughly half of which is funded by scrapping the tax cuts, and half by having a much smaller operating allowance for future years.

The other big variable here is debt.

National remains committed - one might say fixated - on reducing net debt to 20 per cent of gross domestic product by 2020 and continuing to reduce it to between 10 and 15 per cent of GDP by 2025. Labour and the Greens have also targeted 20 per cent of GDP, only two years later, and are content to keep it around that level.

At 22.5 per cent of GDP - that is $60b in dollar terms - New Zealand's net government debt is very low by rich country standards, and the interest rate the Government has to pay on new debt is low by historic standards.

So why this degree of debt aversion? Joyce, like Bill English before him, points to the value of having fiscal "headroom" in the event of inevitable shocks. The strength of the Crown's balance sheet made dealing with the global financial crisis and the fiscal costs of the Canterbury earthquakes easier.


He also pointed to high levels of private debt, especially household debt, which is the main driver of an external debt level which, while down a lot from its peak, is still conspicuously high by international standards. "The ratings agencies still see that as a weak point for New Zealand."

One respect in which the update's forecasts are more cheerful than the Budget three months ago is on the labour market.

It sees employment growing somewhat faster over the next four years and has lifted its forecast for real wage growth, from the feeble levels it was picking three months ago.

In part, that is because it continues to forecast the net inflow of migrants to dwindle, from 72,000 in the June year just ended to 20,000 in four years' time.

It keeps forecasting that and it keeps not happening.

So what if it is right about the demand for labour but is underestimating, as in the past, growth in the labour supply? How secure are the forecast increases of 1 and 1.2 per cent respectively in real wages over the next couple of years?

Not to worry, seems to be the official view. If net immigration remains elevated, that will boost the demand side of the economy, including the demand for labour. So it is more or less a wash.

While the Minister talked of the economy heading towards virtually full employment, the forecasts have the number of unemployed falling by only 9000 over the next three years. Shame about the other 123,000.

Joyce said the average wage is predicted to grow from $58,900 now to $65,700 over the next four years.

He is clearly uncomfortable that someone on the average wage faces a marginal tax rate of 30 per cent, and will continue to if the threshold changes due for next April come into force.

But his conditions for a further package are that it be funded from cash surpluses and not from borrowing, because the net debt reduction target has priority.

And there is a ratchet under the operating and capital spending commitments of the May Budget.

At times on Wednesday, Joyce sounded like he was channelling Robert Muldoon's line: "I've spent the lot". No scope for further tax cuts without either cutting spending or borrowing more, or at least more than he wants to.

And no room for more spending without raising taxes or borrowing (more than he wants to).

But there is more wiggle room in these numbers than that implies.

The unallocated operating allowances, of $1.7b in each of the forthcoming Budgets, are more roomy than similar provisions since the GFC.

And it is hardly unorthodox to borrow to fund long-lived infrastructure assets.