$12,700 for every New Zealander – the cost of no growth

New Zealand is a poorer country than it was forecast to be in 2023. Photo / Dean Purcell.

Each New Zealander is likely to end up $12,700 on average worse off than forecast in Treasury documents published just two years ago, thanks to the depth of the current recession.

The figure comes from comparing Treasury’s last and most positive forecast of the post-Covid recovery, published at the Budget in 2023, with more recent forecasts.

Treasury publishes forecasts twice a year most years. Each revision since 2023 has shown a worsening economy. A comparison of the last set of positive forecasts with Treasury’s most recent figures, which come from last December, shows just how much poorer New Zealand is relative to how it was expected to perform.

Infometrics chief executive and economist Brad Olsen did an even deeper dive into the data. He found that over the last two years, GDP has cumulatively been $16.4 billion lower than it was forecast to be – a revision that works out to about $5,300 per person.

But the pain doesn’t end there. Revisions to growth over the next two years have knocked a cumulative $28.3b off the forecasts – shaving $7,400 per person from the forecasts out to 2027.

The figures come as the Government tries to shift focus to its growth agenda – a suite of policy changes designed to restore growth to the economy and lift the national wealth.

Finance Minister Nicola Willis – who is now also the minister for Economic Growth – made growth the centrepiece of a speech to the New Zealand Economics forum on Thursday in which she positioned growth as the Government’s primary objective, arguing that in the past, “complacency” over the “inevitability of economic growth” meant governments traded growth off “against a host of other values”.

“That stance now seems blissfully naïve,” she said.

Willis told the Herald the figures illustrated “the reality the forecasts published before the election have proven to be wildly optimistic”.

“Treasury had overestimated what growth would occur and what this underscores is what a significant impact small impacts in our economy can have,” she said.

It’s important to remember that throughout most of this period, the economy was growing. The economy is getting bigger and, more often than not, New Zealanders, individually, are usually getting a bit wealthier each year. What the figures do show, however, is that New Zealand is growing much less than previously thought – and that has huge implications for households, businesses and the Government, who are all having to adjust to being poorer than expected.

Olsen said for households, this meant decisions people made some years ago like taking out a mortgage looked more challenging now because incomes had not risen as fast as thought.

It’s also a challenge for the Government, which bases its spending levels on how much money it thinks it will receive in tax revenue.

If the economy isn’t growing as fast as previously thought, then the Government will not have enough revenue to pay for the spending it had planned, creating a large deficit.

You can see this in Treasury’s forecasts.

Finance Minister Nicola Willis wants higher growth. Photo / Alex Burton

In 2022, despite Labour delivering one of the largest Budgets, measured by new spending, in history, Treasury reckoned the books would be back in surplus as soon as 2025. Another large Budget and slightly lower growth in 2023 pushed this forecast out to just 2026.

In just a matter of months, at the Prefu (Pre-election Economic and Fiscal Update) forecasts, Treasury revised economic growth down substantially, pushing the forecast surplus out by a year to 2027. A few months after that, in December’s forecasts, Treasury slashed the surplus from $2.1b to just $0.1b.

By the time the 2024 Budget rolled around, the surplus had slipped another year, to 2028, despite the new coalition Government delivering public spending cuts. Treasury said revisions to the growth forecast had wiped roughly $18.5b from the Government’s books, once the tax cuts were taken into account.

Revisions in the December forecasts have pushed the surplus beyond Treasury’s four-year forecast period, with a surplus only anticipated in the 2030s, under the traditional Operating Balance Before Gains And Losses (Obegal) measure. That will mean the longest string of deficits since the Government shifted to modern accounting in 1994, and only slightly shorter than the 1970s-1990s deficits, which were measured under the old system.

The damage of this mismatch between spending and revenue will be severe. With declining growth forcing the Government to borrow money to plug the deficit, debt is growing far faster than expected.

At the 2023 Budget forecasts, net core Crown debt was forecast to be $181b in 2027. It’s now forecast to be $219.9b, about $39b more. Prior to the pandemic, the Government’s total debt was $57b.

Olsen said you could see the ripples of this throughout the economy. He said that in real terms, business investment (not adjusted for population) over the 2025-2027 period is set to be a cumulative 6.2% lower according to Hyefu (Half-Year Economic and Fiscal Update) 2024 forecasts, compared with Budget Economic and Fiscal Update (Befu) 2023. That’s $9.2b less real (09/10 dollar terms) business investment.

Olsen said the revisions were due to Treasury initially underestimating the strength of the economic bounce-back after the pandemic and, as a result, becoming over-optimistic in its forecasting of the strength of the recovery, which turned out to be much less strong and sustainable than thought.

“If you look back at the earlier stages of the pandemic, there were better economic results, better fiscal results coming through that effectively meant Treasury was undercooking in its forecasts what was happening out there in the economy and in the Government accounts,” he said.

“Partly it was understandable. At that time, it felt like things were too good to be true and couldn’t remain quite as good ... As those good results in the economy kept coming through, Treasury started to revise their forecasts and bake those stronger expectations in because of how often they were seeing them and how often they had to revise up their forecast.”

Olsen said that what happened after these revisions was that it became clear that the better-than-expected activity “was coming through from some of the stimulus that had built up and Treasury has had to revise down and almost unbake those stronger expectations from the forecast”.

He said Treasury was trying to “recalibrate what is the new normal”.

Documents released under the Official Information Act show just how quickly things could change. As the recovery started petering out, $9b evaporated from the four-year tax forecasts between preliminary tax forecasts being put to the then Finance Minister Grant Robertson, and the more complete forecasts being sent to him closer to the Budget.

Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.