By Bernard Hickey
So which Treasury forecasts should we rely on Prime Minister?
Next week Treasury is expected to unveil a bountiful set of Budget surplus forecasts for the next four years that allows us to have it all – tax cuts, extra social spending, two major quake rebuilds and debt repayment. Very strong overall GDP growth is likely to power tax revenues much higher than even the Treasury thought just seven months ago, giving the Government big surpluses for equally big election promises next year.
We know this because this week Prime Minister John Key gave us the nod and the wink about what will be in the Half Yearly Economic and Fiscal Update (HYEFU) on Thursday. He was responding to an opinion poll that showed 79% of voters would prefer the Government spend the growing surpluses on extra social spending or debt repayment, rather than on tax cuts.
Speaking after Cabinet was briefed on the HYEFU, Mr Key said the framing of the question was all wrong because it assumed the surpluses weren’t big enough for voters to have it all.
"When you see the HYEFU numbers, what you'll see is the budget surpluses start hockey-sticking up and they start getting quite big," he said.
Pressed again on whether the Government could 'do it all,' he said: "I think when you see the numbers next week, that's what you'll think as well."
He didn’t quite use the word “bigly”, but there were a few Trump-like assurances along the lines of 'believe me, when you see the size of my surpluses you won’t be asking these questions.'
Referring to Treasury’s forecasts and its 26 years of adherence to the Public Finance Act to give an honest account of the fiscal outlook is a perfectly rational thing for a Prime Minister to do. Treasury’s record as a forecaster is among the best in the world and the Act was a pioneer in being designed to stop politicians cooking or hiding the true state of the Government’s books before elections – as happened several times in the 1980s.
But Mr Key’s reliance on those forecasts for some big talking certainly jarred just two days after he rubbished the Treasury’s forecasts in its Long Term Fiscal Outlook delivered last week. Under the same Public Finance Act, the Treasury has to forecast at least once every four years what the Government’s books will look like by 2060 if it continues on with its current settings.
Treasury pointed out for the third time in the current National Government that an ageing population allied to the current settings for New Zealand Superannuation would blow out the Crown’s net debt to over 200% of GDP by 2060 from 25% now. Treasury again suggested the Government extend the age of eligibility for New Zealand Superannuation to 67 and move to a less generous form of indexation than the current one linked to the average wage. The trouble is Mr Key has promised to resign if either one of those two changes are made.
So his response this time was to say those particular long term Treasury forecasts were not reliable, and his proof was that the short term ones were not reliable either.
"The cool thing is Treasury can’t get their predictions right in 44 days, let alone 44 years. They constantly get it wrong," Mr Key said.
He was referring to Treasury’s forecasts before the Budgets in May 2015 and May 2016, which were for small deficits when the Government had targeted surpluses. Eventually, the final numbers registered small surpluses, but not before causing some embarrassment for the Government.
Mr Key had not forgotten when he was asked if he was betting his legacy on Treasury getting its long term forecasts wrong.
"I’m telling you it’s a load of nonsense, because they can’t get predictions in 44 days right, let alone in 44 years."
It is extraordinary for the Prime Minister to call the Treasury’s short and long term forecasts a “load of nonsense” and yet rely on the medium term ones to promise all manner of riches to voters on the eve of an election.
Treasury’s forecasts are worthy of respect. Mr Key may well be right that the Government can afford it all for the next few years, but if that was the case it should also address those longer term challenges evident in the Treasury’s long term forecasts.
One way to credible address the issue is to use the good times now to prepare for the longer term challenges. Michael Cullen resisted Mr Key’s calls from 2005 to 2008 for big tax cuts and instead set up the New Zealand Superannuation Fund and KiwiSaver. That was a sensible way to address those long term challenges, although Dr Cullen also fell short by not dealing with the elephant in the room of those unsustainable New Zealand Superannuation settings.
If there is enough in the surpluses to ‘have it all’, that ‘all’ should include resuming contributions to the New Zealand Superannuation Fund, which Mr Key said in 2009 the Government could not afford. He should also allow a proper bi-partisan debate about those pension settings around the age of eligibility and indexation.
That would be the exact opposite of a “load of nonsense.”
A version of this article also appears in the Herald on Sunday. It is here with permission.
34 Comments
It would be useful if Bernard had put the list of assumptions inherent in the Treasury forecasts here so that these could be critiqued. Coming to any conclusions whatsoever without doing this is rather "arbitrary".
This article is just another vehicle for Bernard to to roll out his tired old "unsustainable NZ super settings" line.
actually the problem is that the "unsustainable NZ super settings" issue isn't getting any traction - because that's not what boomers (like you) want to hear and shut it down.
At some point the younger generation will understand the issue and will vote accordingly - then Super will be paired back to an affordable level.
Treasury's primary purpose is really irrelevant in this. They're not being used for economic analysis, advice, and forecasting, but as a convenient scapegoat and/or justification for whatever propaganda and bullshit the government wants to disseminate at that time.
Here comes the bribe .....
Saw this article today
http://m.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11759452
Nearly 100 Auckland suburbs have a median value of more than $1 million new data shows.
Figures from qv.co.nz E-valuer show Auckland has 99 million-dollar-plus suburbs and just three suburbs under $500,000.
Well we know why Auckland property prices are starting to cool down and that not to do with any Government intervention to help Kiwi Citizens. It's purely down to foreign investors being restricted and some what to local investors having restrictions with high LVR rates. Though I'm sure if those LVR rates were lifted back to just requiring a 20% deposit there wouldn't be much of a change.
So there's still no way that I'm voting National, I really want to see NZ take the same strategies of helping citizens and stabilizing the housing market, since currently it is completely decoupled from peoples wages.
This recent article from the Herald helps to highlight why our market is cooling along with Oz: Chinese locked out of Oz
http://m.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11759…
Quote from article: "People are finding it's very hard to get a mortgage here and then find they can't get their money out of China, and they're stuck".
Lulu Pallier, Sotheby's International
While there's still strong demand for Australian property from Chinese buyers, their inability to raise funds is dampening enthusiasm for dealing with the previously cash-laden and lucrative group, says Scott Kirchner, who runs China operations from Shanghai for Australia's Beller property group.
Interesting comments. Something to consider is that in Australia foreign buyers can only buy new builds - not existing properties. A recent article on Bloomberg highlights that the increase in local house prices has been largely due to the local home buyer / investor not foreigners ( foreigners were described as " the cream on top" only contributing at most $A122 to house prices a quarter) ( there have been similar comments about the Vancouver market as well).
https://www.bloomberg.com/news/articles/2016-12-02/houses-too-pricey-da…
I suspect it is no different for Auckland / New Zealand. Stuff has an article that implies that these are cashed up buyers - so no need for a mortgage. Additionally the statistic is quoted that 23 percent of the population of Auckland identified as being of Asian decent (from the 2013 census). Therefore the comment that auction rooms are full of Asian buyers is not hard to believe but are they old or new immigrants - locals or foreigners - difficult to tell unless you ask.
http://www.stuff.co.nz/business/property/86050254/blowing-bubbles-cashe…
There does appear to be a change in the Auckland market sentiment.
My argument is that the whole house price increase has been largely due to locals rushing round engaging in FOMO, pushing up prices without consideration for the economics of the price increases and that foreigners have been in effect only the "cream on the top" - but are being blamed (sound familiar....).
how are we to know the real truth, this government has refused to implement a proper register why?
why did they make LINZ make a form to hide who buys and sells NZ or foreign? or do they know (through RE contacts) and they dont want the public to know.
there is and old saying it is easier to fix a small problem than let it fester and become a disaster
we know from figures released they other day spend on housing has risen sharply , most headed offshore in interest payments and some in income(how much we do not know)
http://www.stats.govt.nz/browse_for_stats/people_and_communities/Househ…
how is that good for our consumer economy now and more importantly in the future as it is only going to get worse if we don't addresses it
Vancouver Average House Price Plunge Is Largest On Record: BMO
Incorrect comment vancouver did have a large % of foreign buyers however theye have now gone because of the 15% stamp duty
Anyway saying it's not working in Vancouver you really need to question their motive.
Haven't seen a single article saying prices in Vancouver booming following the stamp duty.
http://www.bnn.ca/b-c-housing-tax-drives-down-foreign-buying-in-vancouv…
VANCOUVER - Foreign buyers continued to scale back Vancouver-area property purchases in October after British Columbia introduced a tax on international investors aimed at cooling the city's red-hot housing market, data from the province showed on Tuesday.
Overseas investors made up 3 per cent of home sales in October in Metro Vancouver, according to data from the province's finance ministry. That was slightly higher than 1.8 per cent in September but well down from the 13.2 per cent between June 10 and Aug. 1, the period before the tax took effect.
British Columbia introduced
From the Canadian Mortgage and Housing Corporation
"In fact, we aren’t. While it would be convenient to hang all of the blame for high prices on others — offshore buyers — it’s just not that simple. Sure, it makes for a tempting narrative: them, not us. And while foreign investment clearly is a factor, it is not the only one."
https://www.cmhc-schl.gc.ca/en/corp/nero/sp/2016/2016-11-30-1600.cfm
interesting article a lot of parallel with NZ, high immigration, low interest, lots of credit and a favourable tax system for housing
especially the chart showing no data on foreign nationals owning canadian property and how they have tried to capture the information.
I agree with his conclusion that the amount of debt taken on to fuel it will hurt the country down the track
It doesn't matter what the Treasury predictions are the PM will just lie and do whatever he feels like will win the next election. Talk of a tax cut will be dangled like a carrot. Saying we can have everything isn't true. If the tax cut was put towards debt reduction then the country would have even less debt. Although at the moment the social spending needs to be higher. The squeeze has been put on many Government departments for years and I'm wondering how many deferred expenses are building up.
A lot of the media missed the decisive shift against the government in Mt Roskill because they lack resources on the ground. There is a lot of moaning about post truth politics -blaming it on personalities like Key or Trump -rather than looking at the deeper structural problems such as the media not adapting a business model to cope with an age where people are getting there news via social media.
Anyway I tried to cope with this in my small way -by being a citizen journalist. Writing a simple article describing my experiences on the ground in Mt Roskill -which I spread through my social media networks. If a lot of us did this -then perhaps this would be a good way to cope with post-truth politics?
The article I wrote 3 weeks about the issues in Mt Roskill as I saw it, is here https://medium.com/@brendon_harre/housing-affordability-on-the-ground-8…
Watch the video of Michael Wood and Andrew Little giving post by-election winning speeches to see that they essentially agreed that housing affordability, transport and giving people the opportunity to make a start, get established in a supportive community were the important issues.
https://www.facebook.com/NZLabourParty/videos/10154147493276452/
Typical of national government - nothing new.
Only if media starts asking hard questions to government.
PM is correct in saying HOW THE QUESTION IS FRAMED as is the key to get the desired result in survey and in NZ agencies and media is mostly monopolize by government.
An fascinating read is the book by Margaret Pope about her and Lange. Really interesting because Margaret doesn't really have a political bias, so the book is a record of her observations of the time. She talks about how Muldoon sidelined treasury, which created the vacuum for crazy new ideas to ferment in that outfit. That is how the neo-liberal ideology got a foothold, and along came an willing convert in Roger Douglas.
What is also apparent to the observant reader, is that no one in government really has a clue what they are doing.
http://www.fishpond.co.nz/Books/At-Turning-Point-Margaret-Pope-Finlay-M…
Congratulation National Government for achieving your goal with your policies
http://m.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11759452
Must be patting their back.
Tax Cuts
Powerful symbolism - the only beneficiaries of a tax cut will be those lucky enough to pay income tax
The bulk of Government revenue is now derived from GST and fuel excise - not income tax
Less than 50% of people actually end up paying income tax after taking account of WFF and Accommodation Supplement
This statement is a veiled coded message to the wealthy and the elites to maintain the faith
Problem is tax cuts will not fix Auckland's transport problems - and won't help the young buy a home
From the SST today
"Projecting one's own failings on an opponent is a truly Trumpian tactic to deflect focus and evade responsibility.
Here are three possibilities for Key's behavior:
He understands economics but believes voters buy his spin not the facts.
He doesn't understand economics and doesn't care.
He believes his trader's instinct is superior to reputable data."
Take your pick but the country still will have to wear the results well after the Beloved Leader is gone
Time to take the focus of what matters, and polls being wrong again. did not MSM have mt roskill as a close race. next day we have JK talking up tax cuts.
here is my list, debt reduction, restart contributions to the super fund, more for health , education , law and order
and more spending needed on roads and transport.
plenty of things need more money spent on them that have stood still over the last few years before he puts money in my pocket (would be nice though)
last I don't like WFF and accommodation supplements they both distort and should be done away with and changed to a simple tax system, no tax on the first 20 k, much easier and cheaper to business and the IRD to run
My understanding of what Key is hinting at is that there will be more emphasis on benefits like working for families and the housing supplement than tax cuts. We really have to look at what is going on here.
We are increasingly moving away from a fair wage for work from which people can feed and house themselves, to a regime where benefits are required to survive by an increasingly large proportion of the population. Surely this is an indication of the failure of our economy. If our economy was working properly then housing would be affordable and closer to the ratio of 3.5 times the average wage, and even a relatively low paid worker would not require a benefit to support a family. Instead they have lead us to a situation where we have a totally dysfunctional housing market and a low wage low productivity economy.
The net affect of this is that middle to moderately well paid citizens are supporting the lower paid families through taxes while the super wealthy pay nothing or far less than their fair share. It is very comfortable and secure for the very wealthy as this set up isolates them from the pressures and demands of the bulk of the population.
It is long past the time one of the political parties had a dam good look at this, but they all seem to be totally absent and mute. Labour gives no confidence that it would address the route causes and gives the impression that it would simply increase the benefits at the expense of the positively contributing sectors of the economy.
Chris-M I agree with all of your analysis except the bit about having no confidence about Labour addressing this issue. Andrew Little gave a strong and thoughtful speech to the Property Council on this exact issue.
http://www.labour.org.nz/andrew_little_speech_to_the_property_council_s…
The people in the building and property development industry who attended the speech were impressed and gave good feedback.
The problem is the post truth media did not bother to cover it, many preferring instead to lazily repeat John Key trash talk politics.....
OK as far as it goes, but
1 Nothing to address the totally out of control demand from virtually open ended immigration. Yes I have heard their policy of reducing it to 45,000 per year but in a situation where we have large numbers of homeless people near zero immigration is more appropriate. 45,000 per year is still a huge figure and suggests that Labour is content to play the same population growth fuelled ponzie economy, albeit it at a toned down level. This factor is perpetuating a low wage low productivity economy with no incentives for businesses to raise productivity.
2 Nothing about the the totally rigged market for building materials in NZ. How much do they receive from Fetchers and others as donations? Apart from land availability material prices must be one of the most significant factors.
I think Labour need to continue working on this housing issue. It is a key social issue affecting so many other areas. But at least there is evidence they have made a start.
Re. 2 I know Phil Twyford was big on this a few years ago. I remember him being interviewed on Paul Henry about the fact Knauf- the wold's biggest plaster board making couldn't break the Gib Board monopoly and have left the market. A quick google bought this up -http://www.labour.org.nz/commerce_commission_inquiry_needed_into_buildi… from two years ago.
Chris-M you are right Labour need to continue pressurising the government on their inaction on these issues.
Bernard, me old sport, what exactly is wrong with tax cuts, provided they are done fairly? Is it generally better for a large, excessively bureaucratic organisation called government to waste our resources for us on whatever is the fashion of the day?
Personally, I'd like to see tax cuts aimed squarely at two things:
1 Reducing inequality, ie, people whose income falls in the bottom 25%.
2 Investing in our future by having a reduced company tax rate of 15% (same as GST) for businesses with a turnover under $100 million per annum.
Large business gets a bad rap quite deservedly, these stale, bureaucratic dinosaurs are destroyers of jobs and tax avoiders, they specialise in creating a regulatory environment that prevents competition arising.
Smaller businesses are the employers of the present and the future. They are the only people in our society who actually have productive uses for capital. Their principal source of capital is reinvested profits. By encouraging them to leave their profits in the business we grow our seed corn for the future.
http://i.stuff.co.nz/business/property/87122221/david-slack-hold-my-bee…
Good article discussing John keys 2007 housing crisis speech... back when Auckland didn't have 99 suburbs with 1 million dollar median house prices.
Yeh i agree with you. Bernard should stop pension Bashing. If the age is increase people will only go on other types of sickness benefits. If the treasury's surplus forecasts are right contributions to the Super fund and Kiwisaver can be restarted.Lets be pro-active not reactive all the time
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