Govt needs to relax spending limits now, if it wants to cushion the economy’s slide.

It is high time for the Government to go easy and give itself more room to manoeuvre in setting fiscal policy.

And Finance Minister Bill English has indicated it intends to do just that.

On Tuesday the Treasury releases its updated economic and fiscal forecasts, which will be less cheerful than the May Budget's were.

The outlook, English says, is now for "moderate [economic] growth of 2 to 2.5 per cent over the next few years."

Advertisement

That doesn't sound too bad but, when you adjust for population growth running at nigh on 2 per cent, per capita output and per capita incomes don't look so flash.

The last thing we need, then, is fiscal targets which lock the Government into continuing to run contractionary fiscal policy.

Apart from anything else, it makes the job of the Reserve Bank, which is rightly in easing mode, more difficult. Fiscal strategy needs to recognise that we have seen the best of this economic cycle. The peak is a shrinking image in the rear view mirror.

We have yet to feel the full effects of a collapse in prices for our largest export commodity and we face the prospect of a serious drought his summer.

Aggregate activity measures are being boosted by strong population growth, two-thirds of it from net migration.

But at 6 per cent, the unemployment rate is already higher than Australia's, and rising.

And the story that that is simply a surge in net migration offsetting strong jobs growth does not hold up. The quarterly increase in employment, seasonally adjusted, has been shrinking steadily for a year now, and turned negative in the September quarter.

Waning jobs growth and mounting unemployment is not an environment conducive to decent wage increases.

Advertisement

The Government likes to say that with inflation so low (0.4 per cent in the September year) real wage growth has been robust, a bit over 2 per cent. But wages are not the only source of household income. In fact, they make up not much more than half of it.

The broadest measure - the household income and outlay account in the national accounts released three weeks ago - put households' collective income from all sources in the year to March 2015 at $190 billion, 2.2 per cent higher than the year before.

But that is gross.

Net disposable income - adjusted mainly for tax and pension contributions - was $134 billion and just 0.8 per cent higher than the year before.

That would only just keep pace with growth in the number of households.

Adjust for inflation - admittedly just 0.3 per cent in that year - and the national accounts indicate real average household incomes actually fell during a year that marked the peak of the cycle.

And the consumer price index does not include mortgage payments. So for about a third of households, it misses a conspicuous part of their cost of living.

The national accounts also report that households have collectively slipped back into net dis-saving - spending more than their income - after five years in the black.

Against that background, on Tuesday the minister will also release the Government's Budget Policy Statement, which will, he has told us, "reframe" and "refresh" the fiscal targets.

Bill English has been clear that
Bill English has been clear that "any new fiscal targets would be consistent with ensuring net debt is reduced over time". Photo / Mark Mitchell

Since 2010 those targets have been dominated by an unwavering, flinty determination to return the Government's books to surplus in 2014/15 and set net Government debt on a course that would get it back below 20 per cent of GDP by 2020.

The surplus was achieved, though the minister is understandably non-committal about whether the same will be true in the current year.

It was achieved because the tax take surged 8 per cent as the economy went through the peak of its cycle, while his tight fist around the spending reins continued, with health spending, for example, rising 1 per cent in a year when the population grew nearly 2 per cent.

Net debt is running at just under 26 per cent of GDP and the Government's operating spending, at around 30 per cent of GDP, has fallen back to where it was in Sir Michael Cullen's day.

The surplus target has accustomed the public sector to doing more with less and helped turn around what was, after the global financial crisis and Canterbury earthquakes, a large deficit.

But the Treasury has been arguing the targets should be flexible enough to ensure fiscal policy is not procyclical - amplifying upswings and downturns in the economic cycle.

The targets would still have to meet the statutory objectives of ensuring the Government's revenue and expenditure are balanced over a reasonable timeframe and that debt is at prudent levels.

One option might be to have rolling targets, to be achieved over a moving timeframe rather than a fixed date, much as the Reserve Bank's price stability target is defined as keeping future CPI inflation between 1 and 3 per cent "on average over the medium term".

English has been clear that "any new fiscal targets would be consistent with ensuring net debt is reduced over time".

But New Zealand's government debt levels are low by international standards and the interest rates at which it can borrow are very low by historical standards.

The longer term threat to the Crown's finances lies rather in the off-balance-sheet item it refuses to do anything about - the entitlement parameters for New Zealand Superannuation.

Even within existing policy settings, the Government has scope to offer some timely fiscal relief.

In last year's Budget it set itself an operating allowance of $1.5 billion a year.

That is the pot of new money available for spending initiatives and/or tax cuts.

However it then went into the election saying it would confine itself to $1 billion in this year's Budget and next year's too, leaving $2.5 billion for Budget 2017, just ahead of, oh yes, another election.

But it does have, as English admits, the option of bringing forward that loosening of the fiscal reins to next year's Budget.

Why English should loosen the purse strings

• Economic activity is slowing

• Low dairy prices and possible drought pose a further threat

• Unemployment is rising

• More government spending would help Reserve Bank efforts to reflate the economy

• Keeping spending too tight may amplify any downturn