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Home / Business / Economy

Liam Dann: Will the big Government spend-up boost the economy?

Liam Dann
By Liam Dann
Business Editor at Large·NZ Herald·
3 Dec, 2019 04:35 AM4 mins to read

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Finance Minister Grant Robertson, here with Prime Minister Jacinda Ardern, has faced a barrage of calls to loosen the purse strings to boost flagging economic growth. Photo / Marty Melville

Finance Minister Grant Robertson, here with Prime Minister Jacinda Ardern, has faced a barrage of calls to loosen the purse strings to boost flagging economic growth. Photo / Marty Melville

The Government's plan to borrow and spend more on infrastructure has been given the thumbs up by economists, but they don't expect it to provide stimulus to head off the current economic slowdown.

Finance Minister Grant Robertson has this year faced a barrage of calls to loosen the purse strings to boost flagging economic growth.

At the weekend he signalled his intention to take advantage of record low-cost interest rates and bring forward a "significant" amount of spending on infrastructure projects.

Speaking to the Herald yesterday Robertson stopped short of describing the plan as a stimulus package but said "it will contribute to jobs and it will contribute to growth."

He will not reveal details on the amount of new spending, or the specific projects, until next Wednesday's Half Year Economic and Fiscal Update.

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But Prime Minister Jacinda Ardern has promised an extra $400 million for school upgrades and Robertson has indicated that a range of "short and medium term" infrastructure projects - including more spending on transport - will be announced.

Robertson said he didn't want to pre-empt the announcement because he wanted to see the proposals presented "with all of the numbers in context together."

"I used the word significant and I don't use that word lightly," he said.

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Infometrics chief economist Gareth Kiernan is broadly supportive of the policy but said it was unlikely to provide economic stimulus fast enough to take the load off the Reserve Bank.

Reserve Bank Governor Adrian Orr has publicly encouraged the Government to spend more to boost the economy.

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The difficulty was around how quickly that infrastructure spending could feed through to economic activity, Kiernan said.

"In theory it would be nice if it changed things for the Bank and took some of the pressure off but I'm pretty sceptical at this stage."

He cited the Government's patchy record on implementing spending that had already been planned.

"We've got no problem at all with spending on infrastructure," he said. "But in terms of actually stimulating the economy a far quicker way would be giving people temporary tax rebates or benefit increases."

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But BNZ economist Nick Smyth argued the higher level of Government spending would, over time, reduce pressure on the Reserve Bank to cut rates.

"Fiscal stimulus will reduce the risk of OCR cuts and will put, in our view, supply-driven upward pressure on the long-end of the New Zealand [rate] curve on a cross-market basis and versus swaps," he said.

"To us, the domestic case for OCR cuts has weakened meaningfully over the course of the past month. OCR cuts are still possible, but appear increasingly likely to be driven more by global – rather than domestic – developments."

Robertson emphasised that the decision was made because it was the right time to deal with the infrastructure deficit while rates were low.

"The primary goal here is about taking the opportunity when there are infrastructure projects that need to be done, and using the conditions."

The Government has committed to a target of 20 per cent of core crown debt to GDP for its first term but it revised that policy early this year.

Starting in 2021, the Government will target a range between 15 and 25 per cent.

That's potentially a variation of $15b in either direction although the new spending is unlikely to be on that scale.

ASB senior economist Nathan Penny said he foresaw no issues with the Government debt position based on expectations around this new spending.

Infometrics chief economist Gareth Kiernan. Photo / File
Infometrics chief economist Gareth Kiernan. Photo / File

"We're quite comfortable if the Government does look to hit the fiscal gas," he said.

"If the debt is still within the ranges that he is proposing then we [NZ] would still be among the lowest levels in the OECD," he said.

Robertson said the decision to invest more now was made independently from those debt calculations.

"What I can say is we will not be moving away from our stance of careful fiscal management."

In October Treasury reported that the Government's surplus has increased $2 billion to $7.5 billion and net Government debt had fallen to 19.2 per cent of GDP, down from 19.9 per cent a year ago.

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