Steven Joyce is going to be proved right. There is a fiscal hole and a softening economy is making it wider.

I don't like the term fiscal hole. Good policy should dominate over strict debt targets and economic cycles come and go which are often beyond government control.

But the Labour-led Government's fiscal hole is looking deeper by the day - and bigger than the $11.7 billion of additional borrowing that Joyce identified.


Growth is weaker, the Government is already borrowing creatively to the tune of $6.4 billion via Crown entities (keeping it out of core government net debt metrics) and spending demands are headed one way.

That combination will pressure its fiscal position.

The good news is that the 2018 Budget showed the books are in great shape to absorb such challenges.

Fiscal surpluses are projected for the next five years. Net debt is around 20 per cent of GDP and low by world standards. We're in good shape.

Now is the time to just let the so-called fiscal stabilisers (the cyclical economic component of the budget projections) run their course.

If that means missing debt targets, then so be it.

The Reserve Bank is not rigid on a 2 per cent inflation target and neither should the Government be straightjacketed by an arbitrary level of debt. Some are calling for more spending on infrastructure to stimulate the economy, and abandoning debt targets altogether.

That, however, is a step too far.


Turning the dial on fiscal policy also takes time.

Borrowing to try and build more stuff against a backdrop of capacity, credit and cost issues in the construction sector won't do much anyway.

I'd favour more attention to detail when it comes to this country's economic plan. The 2018 Budget stretched the definition of an "economic development initiative". Those initiatives, or the lack of them, was a glaring hole.

Conversely, the combination of a weaker economy and rigid adherence to the 20 per cent debt target and budget rules will require a revising of the Government's social spending agenda.

The composition of spending should always be looked at but cutting spending to hit arbitrary debt metrics in response to weakening growth would be a policy mistake.

This is not the time to over-react.

I'm not saying that fiscal responsibility goes out the door. Far from it. It's about getting the right mix and balance between fiscal responsibility and delivering on social and economic imperatives.

Before the election there was broad agreement from economists, myself included, that there was no fiscal hole in the Labour's fiscal plan.

The lack of money left in the kitty post the 2018-Budget raised issues of credibility, but the fiscal parameters were technically achievable.

It wasn't going to be easy, but it was possible, so the Government was given the benefit of the doubt.

But the picture is changing and the Government's ambitions are looking more and more like pipe dreams.

So, what has changed?

Budget spending and investment demands needed funding, whilst at the same time sticking to the narrative of hitting debt objectives and being fiscally responsible.

The result was crown entities borrowing an additional $6.4 billion between 2017 and 2022.

That is an accounting fudge to get it out of the core Government debt figures.

Public sector pay and spending demands are only heading one way.

Few bemoan the need to pay teachers and nurses more but that money needs to come from somewhere.

The realities of a coalition Government meant more needed to be spent. Spending allocations in the 2019 and subsequent Budgets were increased by $525 million to $2.4b per year.

That looked fine against a backdrop of solid projections for growth. But it was a risky strategy with the economy late cycle as opposed to early cycle.

The economy is not tracking as expected. The Treasury is projecting 3 per cent plus growth. Something closer to half of that is on offer.

We won't get that growth back. Each 1 per cent change in growth is worth around $800m in revenue.

And with it goes more than $1b per year in tax.

Over four years you lose more than $4b. A second year of the same sort of growth would really hurt.

The Treasury and Government are under-estimating the transitional cost of changing New Zealand's economic model. As some sectors contribute less to growth than we've seen in the past, other sectors will need to step up. That will take time.

We've been too reliant on debt fuelled growth for too long.

The economic theory and Government projections say there is growth on the horizon from expansionary fiscal policy, strong commodity prices, increases in wages, a lower New Zealand dollar and continued, albeit, moderating strength in migration.

Few bemoan the need to pay teachers and nurses more but that money needs to come from somewhere, writes Cameron Bagrie. Photo / NZME
Few bemoan the need to pay teachers and nurses more but that money needs to come from somewhere, writes Cameron Bagrie. Photo / NZME

You can throw economic theory out the door when you have uncertainty and are changing the structure of your economy, which is what we have now.

Businesses are in a holding pattern. A danger at present though is that businesses talk the economy into a funk and weak confidence becomes self-fulfilling.

The Government is correctly pointing out that the New Zealand economy is in reasonable shape.

Inflation is low, housing excesses are being curbed and credit bingeing has been reined in. That lessens the risk of a major correction.

Odds are rising something untoward will hit from offshore though. Trade war fears are real.

We shouldn't be perturbed with some fiscal slippage. The debt targets will be missed. We can handle it.

A lot depends on the New Zealand economy's transition getting traction and growth rebounding though. If it doesn't, the slippage will become a deep hole.