Brian Easton says the runup to our Budget this year is far from easy

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

Budget 2025 day is Thursday 22 May. About a month earlier in a normal year, the macroeconomic forecasts would be completed (the fiscal ones would still be tidying up) and the main policy decisions would have been made (but there would still be a lot of policy detail to be worked on).

This is not a normal year as Donald Trump zigzags from policy to policy. One shant be surprised if the macroeconomic forecasts are under major review right up to the time they go to press and, despite Prime Minister Christopher Luxon spending a lot of time overseas, there may yet have to be a major policy redirection. Expect the debt track to be modified even if the debt level will remain the government obsession.

For this is the most volatile budget buildup time that I can recall, as Trump's volatility impacts on the entire international economy and financial system. For this is the most volatile budget buildup time that I can recall, as Trump’s weaving impacts on the entire international economy and financial system.

It is not just that it is already difficult to know the timing of the impact of the announced tariff increases, but Trump is promising more (or perhaps he isn’t). His (unpredictable) decisions will affect the latter part of 2025, which will impact on exchange rate and interest rates. If one knew for certain, one could make a tidy killing in the financial markets – I remain poor. Additionally, there is the impact of the tariff changes on exports and imports. Even international services seem to be affected.

Much of what is happening is captured in the notion of an international trade war. Minister of Foreign Affairs Winston Peters objects to the term; I think he is concerned that it may result in panicked attitudes, responses and policies. However, for the cool-headed analyst there are useful lessons from traditional warfare.

Warfare involves sacrifices. Fortunately, trade wars do not involve the loss of lives (directly) but they do involve the economic losses from reductions in output – even Trump acknowledges that (but he promises that won’t apply to the US in the long run – don’t bet on how long it will be).

Warfare outcomes are contingent. The British won the Battle of Waterloo against the French because the Prussians arrived in time. The Duke of Wellington said that ‘It had been a damned nice thing – the nearest run thing you ever saw in your life.’

There are retaliation decisions being made now by all sides which will alter the course of the trade war. We will know the good ones at the end. But the decisions – good and bad – are being made now.

Wellington also said, ‘My heart is broken by the terrible loss I have sustained in my old friends and companions and my poor soldiers. Believe me, nothing except a battle lost can be half so melancholy as a battle won.’

Yes, there may be victors, but no one wins a war except in the sense that the other side is defeated (which seems to be the Trump objective – cost irrelevant).

(A further generalisation is that wars accelerate technological innovations which flow on to civilian life. An example is how air warfare led to giant leaps in aircraft design; the Ukrainian invasion is likely to generate parallel development in drones. Not sure of that insight’s relevance here but keep it in mind.)

A world war changes the whole world order (as we saw after World War II). The outcome of an international trade war is uncertain. My guess is that the US will play a lesser role in the future – although that is not Trump’s intention. However, China may not play as great a role in the new world order as it hopes. Perhaps the lesson of not allowing anyone to be too dominant has been learned.

New Zealand’s objective has to be a world economic order based on the rule of law, which is more protective of the interests of small countries, in contrast to a world where bullies rule. Our contribution to attaining it is likely to be small, although Prime Minister Luxon is making an effort. He might recall – hardly anyone else does – that towards the end of his time as Prime Minister, Rob Muldoon got very involved in trying to resolve the international debt crisis – with little effect. New Zealand is too small to be significant. A return to a rules-based world economic order may be achievable but New Zealand may have more influence working with other small-economy nations than spending its time schmoozing with the biggies.

Many of the lessons from the warfare parallel belong to a longer-term time horizon and will not be important in framing the budget. Even so, the short-term impact of the trade war on exports, exchange rates, prices, and interest rates will.

Even if they were not, the 2025 budget would have been a challenge. The economy has been weaker than was expected a year ago. That reduces tax revenue and lifts some welfare spending which means that government borrowing is likely to be higher than the government wants. The effort to cut back government spending will continue although some of the big spending ministers – defence, health, housing, transport – are pressing for their portfolios to spend more.

The trade war need not be all bad news. The Chinese rejection of US soybeans may lift its demand for NZ foodstuffs, offsetting our marketing difficulties in the now more protected US markets. Or perhaps it won’t. Unable to export to the US, the Chinese may send us cheaper electric vehicles. But the gain may be offset by a lift in the NZ exchange rate.

International interest rates are expected to rise. As a net borrower internationally, New Zealand will suffer; that includes the fiscal position.

The rates have not been helped by Trump demanding the US Fed reduce them, and threatening to replace the Fed’s chairman. Whether he can or not is almost irrelevant. Financial markets are spooked, with the added complication that while the usual financial refuge during times of uncertainty is US Treasuries (government bonds), this time they are a source of uncertainty.

Whatever you think of our politicians, spare a thought for the Treasury accountants and economists preparing the budget. The technical issues require judgments beyond the call of duty. If I were one of them, I would probably be thinking that a mini-budget towards the end of the year must be an option – it need not be called that, of course – and that the May budget should be framed to give flexibility to cope in an exceptionally volatile world.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.