Business investment tipped to slow with new Government: Westpac

The new Government has announced a broad swathe of policies likely to affect the economic outlook. Westpac's economists have been quantifying the effects of the changes on the economy. Business editor Dene Mackenzie reports.

The first impact the new Government will have is on business confidence, Westpac chief economist Dominick Stephens says. Businesses seemed nervous and business confidence was dropping, he said.

Westpac economists had allowed for a temporary period of slower business investment as businesses held off until they understood the new regulatory environment better.

The Government planned to cancel next year's scheduled tax cuts, which would have boosted economic growth in 2018 by about 0.4 per cent.

While it would be partly offset by increased transfers such as Working for Families, a new winter energy payment and a boost to student allowances, the net impact on the 2018 GDP forecast was negative, he said.

From June onwards, the new Government planned to spend more than the previous National-led government planned, only partly financed by extra tax revenue.

The balance would be financed by borrowing about $7 billion more over four years than the previous government planned.

"In other words, the economy will experience a classic borrow-and-spend fiscal stimulus."

In the 2018-19 financial year, there would be about $1b of extra spending directly boosting GDP, mainly on education and health. That would rise to $2b in 2019-20 and by a further $1b in each of the following years.

The extra spending was a big change, Stephens said.

Calculating the impact of extra government consumption on GDP was not simple. Some of the government spending would go on imports, making no contribution to local GDP.

There would be second-round effects such as when a newly hired teacher spent their salary at local shops. There would also be crowding-out effects where government spending displaced private sector spending, he said.

Direct examples of crowding out included extra public healthcare spending leading to less spending on private healthcare, government employment creating labour shortages for firms, and government building driving up construction costs.

Crowding out could also happen indirectly from fiscal stimulus driving up interest rates and the exchange rate.

"Finally, today's government debt must be repaid with tomorrow's taxes and tax, discouraging private sector activity," he said.

New Zealand's openness to trade would mean more government spending on imports while the flexible labour market, floating exchange rate and independent monetary policy would cause the economy to adjust rapidly, meaning crowding-out effects would happen sooner, Stephens said.

The stage of the business cycle also mattered. Fiscal stimulus had its biggest impact during recessions when there was little crowding out. Its smallest impact was when the economy was operating at full capacity. New Zealand was somewhere between those two extremes.Both international and New Zealand commentators generally agreed government borrow-and-spend programmes had zero impact on GDP after about five years when crowding-out became complete, he said.

The Government's borrow-and-spend plans would not necessarily make the economy any larger in the long run. Mr Stephens noted Westpac's views on crowding out of fiscal policy were not based on debt sustainability concerns. In some countries, government borrowings might alarm ratings agencies, which could drive up interest rates for everybody.

New Zealand did not face that concern. The new Government's plans would leave it with very low debt levels by international standards.