Treasury: bug over-rated

By Brian Fallow

WELLINGTON - The millennium bug will have only a small and short-lived effect on economic growth, the Treasury believes, shaving one-tenth to three-tenths of a per cent off gross domestic product next year.

While acknowledging that these are uncharted waters, the Treasury considered that core services like electricity, telecommunications and the banking system would be ready for the turn of the century.

It said that serious disruptions were inevitable at the level of individual firms and households, but they were not expected to be widespread or prolonged enough to have a significant effect economy-wide.

"The power crisis in Auckland in 1997 involved significant disruption but had little, if any, impact on overall GDP. People found alternative ways to conduct their business and significant new activity was generated in coping with and fixing the problem," the Treasury said in a briefing paper to the Government released yesterday.

The negative effect on growth was entirely due to the disruption effect.

Other Y2K effects, on business investment and inventories, were largely seen as timing issues.

Growth had risen ahead of the year 2000 by "borrowing" from spending which would have occurred later.

The Treasury estimated that spending by businesses on fixing Y2K problems had added 0.1 to 0.3 per cent to GDP growth in 1997, 1998 and 1999. To the extent that this spending represented spending which had been brought forward, there may be a negative of the same order after 2000, it said.

Some of that spending may have increased productivity as well addressing Y2K problems, but it may also have supplanted other productivity-enhancing investment.

The Treasury estimated precautionary stockpiling by firms and households - a switch from just-in-time to just-in-case - might add 0.3 per cent to GDP this year, but would lower growth by a similar amount next year as inventories were run down again.

The estimated effect of the bug was small compared with the combined effect of the Asian financial crisis and the drought which cut about 2 per cent from growth in the first half of last year.