Finance Minister Grant Robertson was granted a reprieve when Treasury opened the books today.
Treasury’s Pre-Election Economic and Fiscal Update (Prefu) defied the gloomiest expectations, with no recession forecast and a surplus pencilled in by 2027.
The economy will grow 2.6 per cent on average over the next four years. By 2027, the economy will be $4 billion larger than Treasury’s previous set of forecasts from May, and GDP per capita will be roughly the same.
The Government’s $4b in spending cuts announced in August have ensured the forecast OBEGAL surplus has only been pushed back one year, from 2026 to 2027. It will be $2.1b - far better than feared.
Annual wage growth is forecast to average 4.8 per cent over the next four years compared to CPI inflation of just over 2 per cent, meaning working New Zealanders will be better off in real terms after a period of wage growth struggling to stay up with inflation.
Finance Minister Grant Robertson said the “economy is turning a corner”.
“We have a solid base as we face the challenges ahead,” Robertson said.
STORY CONTINUES AFTER BLOG
Housing market roars into life, high migration returns
But that is where the good news ends.
The road to surpluses is paved with deeper deficits in the short term. The deficit this year is now expected to be $10b, up from $6.9b forecast at the 2023 budget. Next year’s deficit is expected to be $11.4b, up from $7.6b forecast at the Budget.
Those large deficits contribute to much larger borrowing over the four-year forecast period. As recently as May, net core Crown debt was forecast to be $181b in 2027. These forecasts have revised that upwards to $193.3b, or 39.6 per cent of GDP.
Most of the economic growth occurs in the back end of the forecasts.
The economy is expected to grow just 1.3 per cent next year, and 2 per cent in 2025, only rising to 3.3 per cent in 2026.
The drivers of this economic growth are a cocktail Labour has so far strived to avoid: a resurgent housing market and higher migration.
“The main driver [of growth is] the recent surge in net migration, which contributed to an earlier stabilisation in house prices and supported stronger employment growth,” Treasury said.
Migration forecasts have been revised upwards significantly. In the September 2023 quarter, annual net migration is forecast to peak close to 100,000, about 33,000 higher than forecast as recently as May.
House prices are expected to rise slowly at first, before reaching annual growth of 3.9 per cent by June 2027. Investment in the construction of new homes is expected to slow, but only slightly.
Unemployment is expected to rise to 5.4 per cent next year, and end the forecast period on 4.6 per cent, higher than now.
Inflation is expected to stay higher for longer, with CPI inflation running at 3.8 per cent next year, falling to 2.5 per cent in 2025 and 2.1 per cent in 2026. That forecast is worse than what Treasury was forecasting back in May, when it reckoned inflation would be 3.3 per cent in 2024, and 2.6 per cent in 2025.
This will keep interest rates higher for longer. Real government consumption is trending down, a figure Robertson used to show the Government was keeping up its side of the bargain when it comes to fighting inflation.
Optimistic forecasts - decade of austerity required
The forecasts were underpinned by a number of assumptions that seem optimistic.
The borrowing numbers do not include most of the cost of building things like the Auckland Light Rail project, currently costed at more than $14b, or the building of the new Waitematā crossing, which could run to more than $40b.
Robertson said many of these costs fell outside of the forecast period, and Treasury said how they had been funded had not yet been determined.
Treasury warned that there were “a number of significant infrastructure investments that have been announced, or are in pre-implementation stages, but which have limited, or no funding committed yet, and often no clear funding source identified”.
In this, it included the likes of Auckland Light Rail, The Waitematā Harbour Crossing and Let’s Get Wellington Moving.
The forecasts also assume that the Government will run incredibly small budgets for the foreseeable future, baking in 15 years of relative austerity.
Its central forecast assumes that next year’s budget includes an operating allowance (Treasury jargon for “new day-to-day spending”) of $3.5b. The next two years have their allowances cut thanks to decisions Robertson made last month to $3.25b in 2025 and $3b in 2026.
Every budget thereafter has an operating allowance rising by 2 per cent.
What that means is that the forecasts assume that the Government does not run a budget with new spending as large as this year’s budget until at least 2037.
To put this in perspective, the Government’s last three budgets have averaged operating allowances of $4.8b.
This means the Prefu forecasts a decade of relative austerity with each budget funding cost pressures, but leaving nothing left for new policies, including goodies dangled in the many elections between now and then.
This could be a challenge.
Treasury included a warning in the forecasts saying that “as well as meeting cost pressures in the future, Budget allowances are expected to manage the fiscal impact from new policy decisions made by the Government”.
“Based on past analysis, the remaining Budget operating allowances should be broadly sufficient to meet remaining critical cost pressures not already funded, however, significant trade-offs will be required,” officials warned.
The less jargony translation of that is that these forecasts assume just enough money to keep the lights on and deal with cost pressures in the delivery of government services, but not enough to fund new policy ideas - the kind that get thrown around in an election campaign.
In documents released to the Herald under the Official Information Act, Treasury warned 40 to 50 per cent of new spending would need to go straight to the Health system, just to keep the lights on. That leaves the other half of new spending to deal with cost pressures across the rest of the Government.
Funding both cost pressures and new policies would require cuts to existing spending or revenue increases somewhere else.
That is a problem for both Labour and the party that wants to replace them, National.
Treasury helpfully published an alternative scenario of higher operating allowances, which modelled allowances of $4.5b in budget 2024 (still a smaller allowance than 2023), falling again to $4.25 in 2025 and $4b in 2026 and then rising in 2 per cent a year from 2027.
If the Government followed this track it would mean never returning to surplus, with deficits growing nearly each year to 2.3 per cent of GDP by 2037. Net debt would be more than double where it is currently forecast to be.
This scenario is essentially a thought experiment - no one, Labour or National, would ever allow the books to get into such a state. But they show that the era of easy decisions is over and that if we have a difficult choice between a future of very small budgets, or new spending funded by cuts, or tax rises.
The assumptions underpinning this nightmare scenario are actually not so outlandish. They actually assume the Government running smaller operating allowances than it has averaged this term each year until 2036.
Not a great conversation starter for an election campaign.