New Zealand's slow economic recovery is necessary to get household and government finances back in order, but without significant policy changes the government will struggle to reach its surplus target in the 2014/15 year, the New Zealand Institute of Economic Research (NZIER) says.
Releasing its latest quarterly predictions, NZIER retained its expectation that the Reserve Bank would be able to keep the Official Cash Rate on hold at its record low 2.5% until mid-2013. That is further out than expectations of bank economists, which are pointing to the next possible OCR hike in December this year or the first quarter of 2013.
“The economic outlook is flat. Most indicators are moving sideways. But given the state of the global economy and the ongoing ‘hangover’ from excessive borrowing in previous decades, this is not a bad state to be in. The slow recovery is a necessary part of putting household and government finances in order. This will put the New Zealand economy back onto a more sustainable growth path”, NZIER’s Principal Economist Shamubeel Eaqub said today.
“We expect only 1.5% growth in 2012, recovering to 2.4% in 2013. The rebuild in Canterbury will ramp up gradually from mid-2012 through to 2013. We are less optimistic than most on the timing of the rebuild, as we think persistent aftershocks, tougher building codes and insurance issues will slow Canterbury’s recovery," Eaqub said.
Risk of financial Armageddon has eased
The global economy was slowing with key Asian export indicators slumpiong.
"Activity in key Australian states, NSW and Victoria, has slowed sharply. This is offsetting brighter data from the USA. This is a risk to New Zealand exporters. But the risk of another global financial crisis, this time in Europe, has eased. The ECB has shored up European banks with cheap long term funding," Eaqub said.
Interest rates on hold until mid-2013
"The RBNZ will hold interest rates steady for some time, as the economic outlook is flat and inflation is subdued. We expect the OCR to remain at 2.5% until mid-2013. Any increases in interest rates should be contingent on convincing evidence of a sustained economic recovery and inflation pressures," he said.
Fiscal surplus requires tough choices
A flat economy would make it harder for the government to return to surplus in 2015 without significant policy changes.
"We expect the Budget to be released in May 2012 to reprioritise spending. We would like see a reduction in low value spending, such as interest free student loans, working for families and KiwiSaver subsidies. These savings should be used to reduce the deficit, and to increase investments in the economy, in infrastructure, education and training in particular," Eaqub said.
(Updated with video interview)
19 Comments
Who does this Eaqub think he is? Challenging sacred spending areas such as WFF, interest-free loans and Kiwisaver subsidies indeed!
Why, next he will be suggesting we change other setting that are clearly core to our economy, such as not taxing capital gains, super at 65, or having one of the lowest taxes on petrol in the OECD!
No, clearly the role of government is to cut the deficit by putting the squeeze on beneficiaries, plus reducing spending on fringe areas such as health and education.
Anything else is sacrilege, and to be condemned by all right-thinking NZers!
Cheers
By 2015, the game is over.
To balance the books is easy, though. Rather than sacking people and/or scrapping services, you just pay them progressively less. After all, that is what is happening in the private sector, despite 'investors' believing in the tooth fairy. The western middle-class is poorer in real terms 10 years ago, and probably that 20 years ago. Huge tracts of 'retirement savings' no longer exist, those that sill do are set to follow.
By 2015, my bet is that the TNC's which control and manipulat much of what folk still think of as politics, will be in trouble themselves, and those they've displaced will be protesting with feeling.
Growth, it won't be. But he's partially right - 'investment' in education and training will be important, just as soon as we have the debate as to what will be appropriate. 'Investments' in infrastructure have to be aimed at being long-term resilient/sustainable, and we need to be having that debate too.
I have no doubt English will get a surplus at some stage...that's not the problem!....the real issue is whether govt under this lot or any other lot will continue down the path of surplus budgets and tax cutting.
I fail to see Labour and the Greens following that pathway.
So the effort to create a surplus and to start paying off debt..will soon be wasted by the next bunch of morons to fill the Beehive.
We need legislation that cannot be overturned without a 75% vote in Parliament....legislation that locks govt expenditure below certain levels...legislation that empowers and requires the GG to dissolve Parliament and call elections on budget failures.
The risk to Labour is that long term under National the tax levels will fall and nett incomes rise...leading to the sort of improvements that see and end to Labours pool of voter support. They will not allow that to happen if they get a chance.
Utopia would be gst at 5% and paye as it is or lower, ditto corporate tax with teeth! There would be no argument from those claiming they cannot find work and so demand their WINZ wages each week.
He is right, things will not significantly improve without major change. However in commom with many others all he seems to be able to offer is cutting expenditure. Well the country is so screwed down that
- people can barely afford to buy or build homes
- Many, probably a large majority, of families are just surviving between pay cheques
- The health system is barely able to provide an adequate service
- The education system is barely adequate
- The manufacturing industry has been in decline for decades and has mostly left our shores
- Many of our brightest and best citizens have given up on the country and left and are only being replaced by people from nations where the standard of living is even lower. (How far are we from the situation in Britain where the immigrants are doing so poorly that they want to return to their third world homes)
- We are governed by people who are increasingly look like banana republic dictators
-We are having to sell our farms and state assets to survive
-The only safe and rewarding type of investment are the various forms of speculation
- The tax system is grossly scewed against hard work and inovation while rewarding unproductive manipulation and speculation
-The currency is both unstable and too high making it nearly impossible to manufacture any thing here for export or import replacement
So yes we need some very major structural changes in our economy and they have a lot more to do with gearing it to efficiently producing inovative products and increasing exports than trying to get blood out a stone.
Almost as if its being done to plan right!
These are not entirely new events, although we see that some of the newer symptoms of the disease coming around again, as if by some unknown, unpredictable accident!
NZ will not get structural change, we will get futher degredation, and more indebted until we become bankrupt!
Until that time, the social fallout will continue to get worse, its as simply, obvious as that!
Agree,
The last three are still the same despite a change of Government..........lets see Labour did nothing for 9 years and National is hell bent on doing nothing for 6 or 9 if it can...
So maybe once Labour gets back in we will see a CGT put in place, though for myself I think most assets will be dropping in value...so it seems too late...
We dont need to sell our state assets and farms, its dogma....pure and simple...so far it strikes me as some ppl / organisations are determined not to take the losses they should and whichever Govn is in place will see to it....if only by lack of action....
regards
I'd be interested in knowing how "low value spending" is defined. It seems strange to me that investment in education (interest free student loans) is included in this category, especially when the returns on investment on a higher education are positive in NZ and all OECD countries (fig 12 http://www.educationcounts.govt.nz/publications/ece/81180/5.-the-economic-benefits-of-education-in-nz).
“We expect only 1.5% growth in 2012, recovering to 2.4% in 2013. The rebuild in Canterbury will ramp up gradually from mid-2012 through to 2013. We are less optimistic than most on the timing of the rebuild, as we think persistent aftershocks, tougher building codes and insurance issues will slow Canterbury’s recovery," Eaqub said.
Well put. NZIER are by far the best economists operating in NZ. 1.5% growth for 2012 sounds about right, although I think it might get to 2%. Certainly much lower than Zoro at Westpac's 3.5% (?Check) bizarre prediction. I think Roger Kerr is picking 3% plus too.
"We would like see a reduction in low value spending, such as interest free student loans, working for families and KiwiSaver subsidies."
Again well put, although I disagree with reducing Kiwisaver subsidies. WFF enttilements need to be trimmed back a bit, and interest free student loans I would classify as a "nice to have", but is not sustainable at present
Matches my view very closely assuming things dont go very badly....his is a business as usual sort of outlook not mentioning signifiacnt [bad] events. Of course there is always the danger you look for anything to support your own views...
Student loans, I think the NZ could do as the UK one did some years back, identify degrees and skills that are critical to our economy and only make those 0%, engineers, scientiific, business, computing...."normal degrees" say 2%, stupid degrees say 5%....sociologists, laywers, accountants etc...ie at what ever the bond cost for the Govn to borrow at.
;]
regards
Actually its pretty hard to do this. The key issue here is really that many economic forecasts are often prognostic. If the forecast is not dead on then it can be made to appear inaccurate, so there is always interpretation, depending on the scale of the error. Then there is the alternative problem, when people excuse their forecast because the others are all as wrong. There is a big methodological problem with economic forecasts.
For a laugh look at the write in letter ending this for example,
http://www.debtdeflation.com/blogs/2011/12/30/the-age-economic-survey/
Lot's of angst over John Key transferring most of the questions addressed to him to other Ministers. And lots of instances where those Ministers skirt around answers with Lockwood ruling they did answer, even if it wasn't as forthright (read 'honest') an attempt to address the question as the asker might have expected.
I do hope the issue is taken to the Standing Orders Committee (as Winston and Mallard seem keen to do) - as Key appears to be using the rules as written to deliberately avoid being held accountable for anything happening in his government!
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