Bill English says GDP could fall NZ$50 bln (Corrected)

Finance Minister Bill English told interest.co.nz in an exclusive video interview today that a "remarkable hollowing out of New Zealand GDP" over the next 3 to 4 years could reduce projected GDP by NZ$40 billion to NZ$50 billion. (Corrected to make clear English was referring to cumulative fall of NZ$40-50 billion over four years, not a NZ$50 billion reduction in GDP by the last year.) English said all options had to be on the table in cabinet as the government tried to wrestle massive deficits and debt issuance back under control so New Zealand could keep its AA plus credit rating. Those options included giving up tax cuts and not contributing to the NZ Super fund, although English said the National Government also had election commitments it planned to keep. Treasury's main forecast for nominal annual GDP in its December 18 budget update was for an increase of NZ$36 billion to NZ$214 billion a year from NZ$178 billion in 2008. English's comments suggest that Treasury is now expecting GDP to fall by as much as 7.9% to NZ$164 billion in nominal terms over the next four years. GDP would therefore have fallen by significantly more than 10% in real terms over that period, assuming inflation of 2% per annum over that period. Many economists define a depression as a decline in real GDP that exceeds 10%. This NZ$50 billion reduction over 4 years at least implies a recession lasting 4 years. A spokesman for Bill English has clarified that English was referring to a cumulative fall of GDP over 4 years of NZ$40 billion to NZ$50 billion, rather than the total fall of NZ$40 billion to NZ$50 billion in the last year, which is what I had assumed. Given this cumulative fall would mean a reduction of around NZ$10 billion a year, this does not imply a depression sized hole. Standard and Poor's has warned that the deficit and debt tracks forecast just before Christmas were unacceptable and a credit rating downgrade was likely without significant changes, while Moody's also warned this week that it wanted to see signs from the government that the deficits and debt could be controlled. Asked what the government had to do to keep New Zealand's credit rating, he said there were no solid deficit and debt reduction targets because the economic outlook was changing so quickly for both the government and the ratings agencies. But the scale of the problem was large and getting larger as the economy contracted, reducing the potential size of government revenues. "The hollowing out of GDP over the next couple of years is going to be pretty remarkable," English said in the video interview. "You could end up over the next 3-4 years with NZ$40 billion to NZ$50 billion less than was forecast as recently as December. You can see the difficulty of trying to hit a moving target," he said. Asked if the government would abandon tax cuts planned for later this year and ditch the regular NZ$2.5 billion payment into the NZ Super fund, English said: "Those are matters for debate. Given the size of the challenge here, pretty much everything has to be on the table, but of course there are political constraints around undertakings we made as an incoming government and we're determined to follow through on those undertakings." Elsewhere, English said he would encourage New Zealand's banks to issue government guaranteed debt on international markets soon and that he did not want to see the government's balance sheets burdened in the long term with the liabilities of finance companies. Click the video above to see the entire interview videoed in English's Beehive office.