Treasury has delivered a broadly unchanged outlook for the New Zealand economy in its pre-election fiscal update relative to forecasts in its May Budget, but warned of large downside risks to its latest forecasts due to global market uncertainties.
The PREFU released Tuesday afternoon showed the government returning to a larger-than-forecast surplus in 2014/15, and net core crown debt hitting a lower peak than forecast in the May Budget.
Treasury pushed back its expected timing for when rebuilding in Christchurch would get underway from the first half of 2012 to the second half of the year, but said higher-than-expected costs from the Canterbury earthquakes would mean higher investment and growth in subsequent years due to the larger rebuilding efforts.
That rebuild would help offset the effects of a weaker global economy, Treasury said. Trading partner growth was revised down by about 2% over the next four years due to uncertainties in global markets, particularly in Europe.
The risks to Treasury’s forecasts were skewed to the downside, due to the global turmoil. In its downside scenario presented in the PREFU, Treasury said New Zealand’s nominal GDP could be a cumulative NZ$35 billion lower over the five-year forecast period to the year ending June 2016. Treasury gave a one-in-five chance of this occurring.
Treasury said it assumed European governments would manage the region’s debt crisis and stabilise financial markets.
“The greatest uncertainty is associated with the euro area sovereign debt crisis, which we expect to be resolved only gradually, with risks around key developments,” Treasury said in the PREFU. Its forecasts were finalised on October 11 and the text was finalised on October 18.
“The outcome of meetings of European leaders scheduled to occur between the finalisation of this text and its publication, and in the period closely following publication, could change the outlook for the euro area and the global economy,” Treasury said.
Bigger initial surplus
The government would still return its books to surplus in the 2014/15 year, with the NZ$1.450 billion expected surplus larger than the NZ$1.297 billion forecast in the May 2011 Budget.
Deficits in the three years between now and the 2014/15 year would be slightly larger than forecast in the budget, the PREFU forecasts showed.
An NZ$18.4 billion deficit in the year to June 30, 2011, would fall to NZ$10.809 billion in the 2011/12 year, NZ$4.438 billion in 2012/13, then NZ$943 million in 2013/14 before returning to surplus the following year.
Finance Minister Bill English said the government was committed to reaching surplus in 2014/15, although “not at all costs.” There would need to be a significant change in the global outlook and tax revenue for that track to be pushed back, English said.
GDP growth in the year to March 2012 was forecast to be 2.3% in the PREFU, compared to an expectation of 1.8% in the May Budget. That would be followed by 3.4% growth in the year to March 2013 (from 4% in the Budget), 3.3% in March 2014 (from 3%), and 2.9% in 2015 (from 2.7%). The PREFU then forecast GDP growth of 2.4% in the year to March 2016.
Meanwhile net core crown debt as a percentage of GDP would peak at 29.0% of GDP in the year to June 30, 2015, down from a peak of 29.6% in that year forecast in the May Budget.
Canty rebuild could cost NZ$30 billion
Continuing seismic activity in Canterbury saw Treasury push back its expected timing for rebuilding in Christchurch by 6-9 months to the second half of 2012, while it increased expected costs from the quakes from NZ$15 billion to NZ$20 billion after reassessments of land damage from the Earthquake Commission.
However Treasury warned the damage could end up being much higher than the NZ$20 billion forecast.
The damage estimates represented damage on property, contents and infrastructure valued at current prices, Treasury said.
“They do not include business disruption or additional costs from inflation, insurance administration or rebuilding to higher standards than existed before the earthquakes,” Treasury said in the PREFU.
“These costs are important and their inclusion could lift the total cost to NZ$30 billion or more,” Treasury said.
Big boost to growth
Treasury said the larger-than-expected Christchurch rebuild, combined with a cyclical rise in residential building activity, and the repair of leaky building, would result in the construction sector contributing around 1.5 percentage points to GDP growth in each of the next two years to December 2013 as activity rose to, and maintained a peak in activity.
Doesn't include KiwiSaver soft compulsion
Meanwhile, Treasury said its forecasts did not include the government's announcement on October 18 to proceed with KiwiSaver auto-enrolment from 2014/15, subject to reaching surplus in that year. The 'soft compulsion' policy was estimated to cost NZ$550 million over four years.
(Updates with comment on KiwiSaver soft compulsion costs not included, video of Bill English, reaction from Labour's Cunliffe)
53 Comments
What figures!....all the public get are projections...I see no figures.....show us the figures!
Let us decide whether the revenue track is likely to be achievable.
Let us decide whether the expenditure outlook is viable.
I don't believe a word of what Treasury say.
The detail is in the documents on this page here »
http://www.treasury.govt.nz/budget/forecasts/prefu2011
and more specifically, here »
http://www.treasury.govt.nz/downloads/pdfs/prefu11-pt6of10.pdf
If it all goes to custard neither will happen I suspect.....just have to hope enough voters also question.....trouble is there isnt much else to vote for...
In the meantime let the floggings continue....
Want to save money? disband Treasury.....I cant see the need for them....
regards
Let's cut to the pipe dream....
"The Canterbury rebuild will provide a significant boost to output and employment over the next few years, providing a powerful offset to the effects of the weaker world economy and, because much of the rebuild cost is met from insurance claims, there is a high degree of certainty that this activity will occur, although the precise timing of the rebuilding work is much less clear.
The earthquake rebuild is likely to take longer to begin than initially expected. This is primarily the result of continuing seismic activity in Canterbury and the implications of this activity for the reassessment of land damage and resulting building standards. So far, earthquake-related building consents remain at a low level. Nationally, the market for new houses is showing signs of a recovery from its trough. Over the past year, an estimated 12,000 to 13,000 houses were built, which is well below the 20-year average of around 22,000 houses built per year.
As well as taking longer to begin, the rebuild is expected to be larger and take longer to complete and we have revised our estimate of the extent and cost of damage up to $20 billion from $15 billion."
Stand up if you believe Treasury have got the above guess right...because that's what it is...a big fat guess!
As for the Treasury comment on house builds...they really do expect a return to the bubble times....do you believe that. How long before these over paid state servants realise this is the new normal...12 to 13000 new houses a year...this is it.....will they ever wake up?
Much of the insurance payout loot will never go into rebuilding, certainly not in chch and possibly not in NZ. For many the damage and payouts are as good as selling for a good price...they get to rent and live off the income on investing the insurance loot. Why blow it all and take on massive mortgage debt?
On top of that, they face stupendously high building costs...plus gst on top. So what if there are whiteware sales and tvs are cheap as....the materials costs alone on a home are frightening...dump the labour charges on top plus gst and the council fees grab....no way...they are out of there.
Grim forecast for New Zealand's finances
http://www.stuff.co.nz/national/politics/5848319/Grim-forecast-for-New-Zealands-finances
The estimated cost of the Christchurch quake has ballooned from $15 billion to $20 billion but it could go as high as $30 billion.
Treasury says the quake cost hike is because of continuing aftershocks and rebuilding is taking longer than expected.
http://tvnz.co.nz/national-news/christchurch-quake-cost-could-hit-30-billion-4482971
With a track record as flaky as the group of miscreants that run Treasury it should be hard for any political party to justify their policies on this stuff.
Personally I hope opposition parties and even the National fellow travellers will be able to cut these projections to ribbons over the campaign.
I suspect that there is not enough firepower available to do anything significant in the time available, unless some international events add weight.
I do note the lowered expectations from Fonterra. I would bet that is not in the treasury guesswork.
Treasury can start a review here -and so can John Key
(From the Fonterra article)
The GDT-TWI has fallen 15.7% since May 3 when the opening forecast for 2011/12 was announced.
“We aren’t yet seeing the recovery of international dairy prices we initially anticipated and we are also dealing with a much stronger New Zealand dollar," he said.
“Higher prices often lead to increased supply into global markets from our global competitors, as well as reduced demand. We are seeing this and it is impacting prices.”
The lower forecast was a reminder to farmers to take a conservative approach with their farm budgets, van der Heyden said.
FYI comments here from the Business Roundtable:
“The Pre-Election Economic and Fiscal Update confirms the need for more decisive action both on the economy and the government accounts”, Roger Kerr, executive director of the New Zealand Business Roundtable, said today.
"While the Update has a welcome focus on restoring fiscal surpluses and improving international competitiveness, the projected progress is slow and could be derailed, while debt continues to accumulate."
"Forecast export volume growth is weak. This reflects inadequate progress in improving competitiveness and rebalancing the economy in favour of tradeables production.
“For example, export volumes in 2014/15 are projected to be only 9 percent higher than in 2010/11, which is significantly lower than the 16 percent market growth (GDP) projected for our trading partners, and much lower than the projected 24 percent rise in import volumes. Faster import volume growth is leading to much higher projected current account deficits in the balance of payments."
"The projected GDP growth rates to 2015/16 of just under 3 percent per annum are materially swollen by the one-off factor of the rebuilding of Christchurch. The underlying growth rate is appreciably lower, as is illustrated by the longer-term projections in the document which are centred on a continuing low rate of labour productivity growth of 1.5 percent per annum.
"As the government is acknowledging, core Crown expenses, at 35 percent of GDP, remain far too high, both absolutely and relative to revenue. Large government spending makes it harder for the exposed sector to compete for resources and high fiscal deficits can mean that an increasing proportion of tax revenues have to be devoted to servicing debt interest.
"Much depends on creating and maintaining a culture of government expenditure constraint. If that is not done, for example through the proposed Spending Cap (People's Veto) Bill, the projected spending constraint may prove to be mere wishful thinking."
"The government has taken steps in the right direction, but they have fallen far short of the decisive action required to get New Zealand on track to close the income gap with Australia and achieve the same standard of excellence the country requires and receives from the All Blacks”, he said.
FYI comments here from ACT on PREFU:
PREFU figures released today show that the National Government is projected to achieve fiscal surplus by 2014/15, as originally projected in the Budget. If achieved, this would place New Zealand in an elite group of countries. But the PREFU also highlights some very disappointing facts, ACT Leader Don Brash said today.
“New Zealand will continue to suffer from anaemic economic growth for the foreseeable future and is projected to have long-term growth markedly slower than the growth assumed for Australia. This suggests that the Government’s objective of narrowing the gap between incomes here and those in Australia is still a distant dream,” Dr Brash said.
“Moreover, there is no sign that our debt to the rest of the world will be decreasing any time soon. The balance of payments deficit, which measures the gap between what we earn overseas from exports of goods and services and what we spend overseas, is projected to grow from around four per cent of GDP now to seven per cent by 2015/16.
“At a time of grave uncertainty in the world economy, with creditors increasingly nervous about countries which can’t control their dependence on foreign borrowing, New Zealanders should not be satisfied with this performance.
“And even this outcome depends on assumptions which Treasury admits are likely to prove too optimistic.
“ACT would strengthen the Government’s resolve for adopting policies that support future generations’ prosperity.
“ACT would restrain the growth of government expenditure with our Spending Cap Bill and would boost productivity by cutting bureaucracy and introducing the Regulatory Standards Bill. Finally, ACT would ensure that young people have access to jobs by reintroducing a youth minimum wage. That’s why it's so important this election that New Zealand gives its party vote to ACT,” Dr Brash said.
Govt Spending ( including SOEs' and crown entities) has grown from $64 billion in 2006 to $99 billion in 2011... (from 39% of GDP to almost 50% of GDP )
http://www.treasury.govt.nz/government/financialstatements/yearend/jun11/07.htm
http://www.treasury.govt.nz/government/financialstatements/yearend/jun11/06.htm
Nominal GDP in 2006 was 158 billion in 2011 it is $200 billion .....
Nominal GDP grew by $42 billion Govt spending by $35 Billion. ( including SOEs' )
That leaves $7 billion of Nominal GDP that the rest of the economy grew by.....
( keep in mind that M2 money grew from $60 billion in 2006 to $82 billion in 2011.. ie we created $22 billion of new money and could only manage $42 billion in nominal GDP growth... broader measures of money grew much larger )
It is kind hard to see how the rest of the economy is going to "grow" NZ out of its problems. ( I mean real growth... not growth due to credit expansion )
For the Govt to run a surplus they are either going to SLASH spending or Tax revenue has to have skyrocket growth.
In 2006 Tax income was about $51 billion ... In 2011 it is $51.5 billion.
With the Govt being 50% of GDP ... it is getting harder for it to A/ reduce spending and B/ get more tax revenue from the economy.....
It is not hard to see that our economy is on life support... which is being provided by Govt spending.... NZ has not addressed ANY of its, so called, "structural imbalances".
Throw in , that we are saling into the headwind of the babyboomers retiring.... and it is hard to see where the profound economic growth, that is needed, will come from.
( I read that 10,000 baby boomers in the USA will be retiring everyday for the next 20 yrs )
ALSO.. throw on top of that the Europe situation.... AT the least , one would assume that aggregate demand would have to drop, as Govts tighten the belt. ( just like anyone who lives beyond their means ... and then has to go on a budget.!! )... It has not happened yet.. but it will.
AND.. don't forget the growing interest payments on the Govt growing debt.
SO.... even thou I couldn't see the French coming close to beating the All Blacks... I just can't see The Govt coming close to a surplus in 2014.
cheers Roelof
Bunch of dreamers, everything is going to bigger and better in the future. What is going to make things bigger and better?? We can borrow to invest in prosperity? No likely we are in debt up to our eyeballs, much more and we will be rapidly downgraded to junk. The rebuild in Chch? The damage has not been counted properly if you think fixing it can be profitable. I have broken many things lots of times, and have never made a profit out of breaking something, not once! Where else would our prosperity come from? Cheap oil? Cheap labour?
Here is some advice, you can't create value from thin air, it take work and it takes effort. Tried and true for generations, that's what you call productivity. If you want security in an uncertain future, plan for it. Work hard, live within your means, spend money wisely, don't waste it, because you have to work hard for it.
Friggin govts wasted my money, sold all my assets, got me into debt, now once the SHTF what have I got. Imbeciles in parliment, smiling and waving and telling me they don't need to plan for a worst case scenario, because their forcasts only include good scenarios. They spew out this crap just to votes. Morally bankrupt, the lot of them.
FYI here's the Greens' response:
The results of the Pre-Election Economic and Fiscal Update (PREFU) show that Treasury are predicting persistent cash deficits and growing government debt continuing beyond June 2016, calling into question the National Government’s fiscal and economic management, Green Party Co-leader Russel Norman said today.
“The PREFU show that the Government continues to run residual cash deficits past the end of the forecast period in June 2016. The PREFU states that these residual cash deficits will be funded by further debt,” Dr Norman said.
“The Government will want us to focus on the Crown operating balance which goes positive in the year ending June 2015. But cash deficits will remain, and the increase in Government debt will continue under a National-led Government.
“Moreover, the Inland Revenue Department is $3.5 billion more pessimistic about revenue forecasts over five years than Treasury’s rosy predictions, with the result that cash deficits are likely to be even worse.
“The Government’s fiscal strategy of tax cuts for the top 10% of income earners is costing the Government $2 billion per year – a very poor quality of spend when facing record borrowing.”
It’s not just the Government fiscal strategy that looks in trouble; the economic outlook is poor. The PREFU revealed today that the current account deficit and the Net International Investment Position will worsen in the years ahead.
“The underlying structural imbalances in the economy remain, with the result that the current account deficit makes a savage return to 6.9% of GDP in 2016, and the net overseas debt increases,” said Dr Norman.
“On fiscal policy, the Government’s failure to consider revenue-raising alternatives will now mean increased borrowing, and increased interest rates for all New Zealand businesses and mortgage-holders as a result of the credit downgrade.
“The Green Party’s proposal to raise a temporary earthquake levy to help pay for the Christchurch rebuild was a better alternative to funding the rebuild entirely through debt.
“For the longer term, the Green Party’s proposal for a comprehensive tax on capital gains (excluding the family home) will greatly assist the rebalancing of the economy onto a more productive footing while providing an additional revenue stream to pay down debt faster.
“If the Government was smart, it would change its current fiscal and economic plan in light of the evidence that it’s still not working,” Dr Norman said.
CGT will be worse the useless if you don't have the CG. More drivel from the greens, what happend to the bad old days when the going got tough, the tough got going? Now it's when the going gets tough, try some happy pills in the form of debt and unworkable negative return taxes. Expecting the housing bubble to reinflate itself is unbelievable. At least he is being slightly more honest about the fiscal outlook.
I really wish that the Green party would show some monetary sense, rather than repeating the typical (but wrong) idea that government accounts work like a house hold.
First of all government deficits are more NZ money, something the economy desperately needs to recover. The question is who gets that money to spend it into the economy, this is the real issue with the Tax cut policy, it transfered new money from the lowest incomes to the highest incomes, the government should be spending the new money (created by the deficit) on education, healthcare, public insurance. This is what QE is, printing money.
Now do we want QE for the rich (bailouts, upward tax re-distributions) or QE for society, pubic insurance, healthcare, education.
Oh, any monetary reform should be introduced which will make it blatently obvious how money works,
Pie in the sky stuff nic....the question is not who gets the money but who pays the debts....you need to revise your 'monetary sense'.
Your obvious display of envy fails to hide the fact that most tax is paid by those earning higher incomes and very little tax if any at all is paid by those earning the lower incomes.
No country has ever paid off its sovereign debt without resorting to inflation and devaluation. It can't be done because the money from debt sales goes into salaries, paperclips, wars, politicians, pensions, offshore bank accounts, subsidies, infrastructure, bailouts, healthcare, etc., which do not produce enough revenues to pay off the debt when it matures.
The idea is to create 2-3% inflation and 2-5% growth. Then a deficit of 3% of GDP, or more when the economy dips, is no problem. New debt can be issued, and maturing debt can be rolled over. The debt level remains "sustainable." Until the percentages go out of whack.
http://www.zerohedge.com/contributed/just-say-no-germany-and-dont-listen-geithner
whats their assumptions around unemployment? Dropping? And therefore steady or reduced social security costs? mmmmmmmm
I think it will increase significantly in the next 1 - 2 years, to perhaps 7 - 7.5%, adding costs and therefore negatively affecting the balance sheet.
Why? Well fewer young kiwis wil be emmigrating - limited OE opportunities in the UK, and reduced opportunities in Aus. At the same time, some inward immigration will still occur, returning kiwis or new immigrants - adding to competition for a limited pool of jobs. Baby boomers will stay in jobs longer, because they want to / have to. We will see youth unemployment increase
Sure we'll see some jobs growth in chch, but Auckland, our largest centre? Tell me where growth will be....Looking at their spreadhsheets infrastructure spending seems fairly flat next couple of years, and much of that will be ChCh. Construction / property /real estate / finance - the traditional engine rooms of Auckland's growth - are dead and are likely to be so for some time yet
Wellington? Govt jobs only likely to be cut, and some further head office migration to Auckland
I wouldnt blame this solely on the "authorities"....the risk of more earthquakes, astronomical insurance costs (or un-insurable), the fact that ChCh is now a backwater and that there are better and safer opportunities in Auckland or OZ is far more important IMHO.
regards
"Prepear for bad times, and you will know only good times" "Hope for the best, expect the worst, and take life as it comes" "failure to plan is planning to fail" - Investing level 1. Sound advice passed down through generations, and completely ridiculed by those responsible for our economy.
I have just been reading the PREFU document on Treasury's website, part 2, and note three assumptions which are dicey:
1. They assume the European debt crisis will resolve and talk about "an orderly resolution". Dreaming will get you everywhere.
2. NZ's top trading partners will have rising growth rates from 3% upwards. Likely..
3. The West Texas Intermediate oil price will rise from $87/barrel to $93/barrel in June 2016. Well the IEA has said that world production of oil peaked in 2006, we have been on a bumpy plateau since then and it can't last forever. Some time very soon it is going to decline at 4-6% per annum and New Zealand isn't exactly first in line for oil tankers. Dream on Treasury.
So if assumptions are wrong, the whole thing is wrong. No wonder people are becoming cynical. You only have to follow the news on the debt crisis in Europe and you don't talk about "orderly resolution of the debt crisis". You only have to follow peak oil discussions and you can dream forever about being on a plateau.
WTI Oil at $93 by 2016..laughable in that its that today....
The average is high 80s now......only being an average (I assume of $93) in 2016 is either plain stupid or they appreciate that we will see wild swings between $120USD and $50USD in a 24month time frame. This will cause recessions when at $120USD and mild recoveries when at $50~80, rinse and repeat for the next 30 to 40 years if things hang together taht well........they dont say that about NZ's economics of course....
So the average of $93 is a number in the "middle" of un-predictable and wild swings, its either plain stupid of them or some profound (re-)thinking......ie acceptance of the outcomes of Peak oil.....given their right wing blinkers, failed neo-classical mantra, repeated mistakes and general incompetance I cant go with the profound thinkers...
Im still for sacking the lot.
regards
I havent bothered much with Treasuries forecasts after their worst case scenario was higher than the actual outcome.....but they did at one stage give expected upper and lower bounds in their graphs....
The problem is politics.....Treasury are right wing as is National, even if they actually dont collude Treasury wants a right leaning Govn so will make the numbers as rosy as they can IMHO....
Hence I pretty much ignore what they say as the best case scenario for Treasury getting it right is luck.....I will go with my own and others open minded research.
regards
BH/Alex,
BE says there is a 1 in 20 or 1 in 30 chance of a meltdown like 2008....? is this BE speaking as finance minister or him quoting Treasury?
Convert that to %s and its 3 to 5% for a recession.....For the record I think is 90% plus sure for a Depression so worse than 2008, recession is 100% going to happen as bad as 2008.........completely diametrically opposed to their forecasts....
I have a word for them and its bull "poop".
regards
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