Another Budget in an underwhelming economy

If people had wanted a centre-left government, one might suppose that they would have voted for the real thing.  Despite the additional redistribution announced in yesterday’s Budget, perhaps they still will.

Still, for all the headlines about money being put (back) in people’s pockets, it is worth keeping the overall numbers in perspective.  Core Crown tax revenue as a share of GDP was 27.8 per cent last year, is estimated at 27.7 per cent of GDP this year, is forecast at 27.5 per cent in 2017/18, and in the final forecast period it is predicted to be 27.7 per cent.  The government isn’t yet shrinking its pre-emptive claim on overall economic resources.  Expenditure as a share of GDP is forecast is gradually shrink, and if that was sustained –  which will be a challenge, including because of the reluctance to act soon on NZS –  it could open the way to future real reductions in the tax burden.

It is sad to reflect that much of the increased spending announced yesterday was simply a palliative for the failures of the government.   The cost of housing is, pure and simple, the fault of successive governments’ land-use regulation.  In a country with plenty of land, and the lowest real interest rates for decades, housing should be more affordable than ever.  That it isn’t, should be something governments are held accountable for (and although governments of both parties have had much the same flawed policies, the current government has now been in power for almost nine years).    And the lack of productivity  growth –  recall that we have had none at all for five years now –  is the biggest single thing that holds back the income growth of working people.    With a well-functioning housing market, and an economy with robust productivity growth, many of the pressures that led to increased spending yesterday would simply have been unnecessary.

As for tax, how many more decades will we have wait before a simple reform like inflation-indexing the income tax brackets is enacted?  Even the United States, with its enormously complex and distorted tax code, manages that one.

Perhaps more importantly, for all the rhetoric about encouraging enterprise –  and more subsidies for favoured uneconomic industries (film, rail and so on), there was no sign at all of action to lower what is probably the most costly and distortionary major item in our tax system –  the company tax rate.   It is curious to reflect that the previous Labour government cut the company tax rate more than the current government has.

I ran this chart a few weeks ago
company tax rates

New Zealand’s company tax rate is in the upper third of OECD member country rates.   For a country that talks a good game about welcoming foreign investment, and supposedly aspires to reverse the decades of productivity underperformance,  it simply isn’t good enough.    Politicians seem afraid of making the well-established economic point that taxes on businesses are typically borne substantially by wage-earners, not by owners of capital.   Less investment than otherwise means fewer high productivity and, thus, high wage jobs.  And if our company tax rates are high, it makes it harder for overseas investors to justify locating an operation here rather than in a lower tax country.   For a country with a pretty disadvantageous location to start with, it is the sort of additional burden we shouldn’t be putting on enterprise.    (I’ve focused this paragraph on foreign investors.  Taxes also discourage domestic-owned business investment, but for owners of those businesses, the maximum personal tax rate is ultimately the important consideration, rather than the company tax rate itself).

Anyone who listened to, or read, the Budget speech itself was clearly supposed to come away with a message about how well the New Zealand economy was doing.  There on the very first page was the Minister’s claim

“Our economy is 14 per cent larger than it was just five years ago”.

Yes, but the population is about 8 per cent larger.  That would leave an annual average growth in per capita terms of 1.1 per cent.  Better than nothing, to be sure, but not the sort of stuff most finance ministers would want to boast about.

And Treasury’s own numbers –  done at arms-length from the Minister –  don’t really back up the Minister’s story, whether cyclically or structurally.

Take the cyclical position first.  Here is Treasury’s estimate of the output gap (positive numbers suggest activity and demand are running a bit ahead of what is sustainable –  “potential GDP” – and negative numbers suggest there is still slack in the economy).

treasury output gaps

On these estimates, New Zealand will have had a negative output gap –  resources being underutilised –  for 10 consecutive years, including the whole of this government’s term to date, and the next year as well.    One can argue all one likes about what governments should or shouldn’t have done to lift potential productivity growth, but these estimates just take for granted what actually happened with structural policy and look at the cyclical position.  And there is really no excuse for putting the economy through such sustained period of resource underutilisation.  I can’t think of any time in modern New Zealand history, when the output gap would have been negative for so long.

Output gap estimates are pretty bloodless things, that don’t necessarily resonate with a wider audience.  They also can’t be observed directly.   But here are the unemployment rate numbers (actual and Treasury forecasts).

Tsy U

Last year, Treasury told us that they thought the

Treasury takes the view that the unemployment rate consistent with full employment (the nonaccelerating inflation rate of unemployment or NAIRU) has also fallen over time, so that…. it would be closer to 4.0%

I’m not sure precisely what number they had in mind, although in a chart included in that 2016 paper, the unemployment rate levelled out at around 4.1 per cent, so I included an indicative NAIRU line in my chart at 4.1 per cent.   But whatever the precise estimate, on official numbers and Treasury estimates we are looking at 10 years (or perhaps 11) with an unemployment rate higher than necessary to keep inflation in check.  The government has consistently presided over less than full employment.  That is simply poor economic management, and since we know that having a job is one of the best ways to secure better life outcomes, it is pretty poor management more generally.

Perhaps such unfortunate results might be excusable in a country that had no discretionary monetary policy leeway left (interest rates were already at or just below zero), or which was in fiscal crisis and had no borrowing capacity left.   Places like Portugal spring to mind.    But not New Zealand.   We have a floating exchange rate and our OCR has never got below 1.75 per cent (and even if that capacity had been exhausted, our public debt has been relatively modest).

It is also easy –  and right at one level – to blame the Reserve Bank.  They do short-term macroeconomic management.  But only as agent for the government and the Minister of Finance.  The Minister sets the targets and is ultimately responsible to citizens for their performance.  I do hope that Treasury, in offering advice to the Minister of Finance (whoever he or she may be after the election) on the appointment of a new Governor, and the design of the PTA, will take seriously the record of underperformance over the last decade.  This isn’t some trivial inside-the-Beltway governance issues.  These are real lives and opportunites that are unnecessarily blighted.

The government also likes to pretend that New Zealand’s economy is doing very well by international standards.   Thus, we are told by the Minister that

“we are at the moment growing faster than the United States, the UK, Australia, the EU, Japan and Canada”

One would certainly hope so.  Our population is growing materially faster than the population in any of those countries/regions.

But what about per capita growth?

I noticed various commentators yesterday suggesting that Treasury’s growth forecasts looked a bit optimistic.  I had some sympathy for that view, but here I’ll just take them at face value.   And I wondered how their forecasts for real per capita GDP growth compared to those the IMF has recently published for each advanced economy.

Treasury forecasts on a June year basis, and the IMF numbers are for calendar years. Over a forecast horizon of four years (Treasury’s horizon), it shouldn’t make much difference.    In the chart below I used Treasury’s forecasts of real per capita growth for the four years to June 2021, and compared them to the average of the IMF’s forecasts for the four years to December 2020 and the four years to December 2021.

IMF forecasts of real GDP pc

If the Treasury numbers are right for New Zealand, our growth in real GDP per capita would be just slightly below that of the median advanced country over the next four years.   I guess that isn’t that bad, but it isn’t much to boast about either.

After all, our per capita incomes are a long way down this list of countries.  On the IMF’s numbers

IMF real GDP pc.png

The aim –  supposedly –  for a very long time has been to catch up again with those top tier countries, almost of whom we were richer than not that long ago.    And catch-up or convergence certainly isn’t unknown, or unexpected, for other countries.   Here is how those Treasury forecasts for New Zealand’s real per capita GDP growth compare to the IMF’s for the 12 countries poorer than us.

IMF and the poor advanced countries

We only manage to beat two of those countries.    In fairness, of course, some of those poor advanced countries are recovering from savage recessions.    But even if one just focuses on the six former eastern-bloc countries, all but one is forecast to not only manage faster per capita growth over the next few years, but also to have achieved faster growth than New Zealand for the whole period from 2007 (just before the global recession) to 2021.  They are catching up. We aren’t.

(Compared with the richest 12 advanced countries, we are forecast to match the median per capita growth rate of those countries over the next four years, but the eastern Europeans are actually catching up.)

In wrapping up his Budget speech, the Minister of Finance claimed that

“we have a strong and growing economy built on a strong economic plan.  We must maintain our focus on growing the economy and sticking to the plan”

Earlier he had claimed that

Under the Government’s strong economic leadership, New Zealand is shaping globalisation to its advantage.  We’ve embraced increased trade, new technologies, innovation and investment.

All this in a country where exports as a share of GDP have been shrinking.  And productivity growth has been all-but-non-existent for years.

The bare-faced cheek of these assertions should be breath-taking.  Sadly, it seems like just another episode in a long succession in which the government simply makes stuff up.


28 thoughts on “Another Budget in an underwhelming economy

  1. This is why I come to this blog, for polished, informative analysis such as this post!

    In support, I feel it’s worth noting that those European countries we are languishing behind would normally be growing faster than their long term average as they emerge from a recession, but the dysfunction of the Eurozone holds them back.

    We have no such excuse.

    And, about budget commentary, I’m pretty annoyed about the Joyce line that only now can we address social deficits (inadequately, at that) when between the government and the Reserve Bank, billions of tax revenue dollars has been forgone by consistently failing to achieve at least 2% inflation – governments spend nominal dollars.

    We can debate the merits of the foregone revenue of earlier tax cuts for the top brackets, but it’s not actually the main issue. In fact, I used to think the main aim of this government was an ideologically driven shrinking of the state, but given the forecasts you presented, even this is no longer relevant so we have a government clearly ideologically adrift.

    While this could lead to a highly pragmatic, evidence driven approach, we actually see election-cycle driven, incremental, ineffectual policies that depend largely on money illusion for public acceptance.

    What’s worse, by largely adopting this government’s inflation, tax and government debt positions, we really do have no parliamentary alternative, other than at the furthest margins.

    Thanks for this post, Michael.

    Liked by 3 people

    • The government has done an excellent job given that they have balanced the budget while having to fund a Christchurch and a Kaikoura earthquake recovery. People forget that these are not small events but very significant events that the government has to fund $!5 billion of that $30 billion rebuild. Kaikoura is another $10 billion which the government will have to fund around $5 billion of that.

      The government has already had to fund the deposit guarantee scheme on Southern Canterbury Finance bailing out mum and dad investors to the tune of $1.6 billion during the GFC.


    • The problem resides in our MMP type government. It requires too much pandering to minority partners that make up the government. National or any party cannot garner more than 50% to govern alone. It is consensus government and really nothing to do with National ideology.


  2. “As for tax, how many more decades will we have wait before a simple reform like inflation-indexing the income tax brackets is enacted?”

    Exactly. The cynical viewpoint suggests no government has done it simply so that they can extort wage earners at their whim and then throw crumbs at them during an election year campaign. Inflation-indexing would remove this “absolute power” the executive have over the proletariat :-).

    The thing that most disappointed me on the budget was the further embedding/reliance on WFF and Accommodation Supplement subsidies and tax transfers. To my mind, this is no way to address the underlying issues that give rise to the need for these programmes.

    Liked by 3 people

    • I agree. Last year there were apparently over 360,000 households receiving Working for Families benefits through the tax system. Making such a large group of people, many of whom are already employed, effectively (more) dependent on government support seems unwise, while the notion of giving more money to those who have more children (and now nothing to those who have none) seems inequitable. Surprised this does not get more attention.


  3. “Net migration is expected to add 212,000 people to the population over the next four and a
    half years, similar to the gain over the past four and a half years”. Buy land I guess……


    • With 650,000 kiwis being classed as dirt class migrants in Australia, expect more and more kiwis to return from Australia and adding to population pressures.


  4. Great analysis Michael -you are a treasure. One small criticism. I am not sure it is accurate to characterise this government as a centre-left government. Really it is a conservative government -in the sense of not wanting to rock the boat.

    NZ has a long history of turning to centre-left governments when reform is needed. The public voted for the 1890 Liberal government in response to the Long Depression. The First Labour government in response to the Great Depression and the Lange/Douglas government in response to loss of trade with our colonial mother -Britain. All three centre left governments very much ‘rocked the boat’ compared to what preceded them.

    In my opinion we need such a reforming government again. To address the issues you mention in housing, productivity, environment…. Whether this is what other voters want and whether the centre left parties would step up to the plate I am not sure…… but that is my hope.


    • “faux centre-left” if you like. I guess they seem a lot like the previous Labour-led government, which also was in many ways pretty conservative in the sense you use the term.

      not entirely sure about the history: the 1984 vote looked a lot like a vote against Muldoon (rather than for active policy reform) assisted by the badly split vote on the right. And in 87 the Labour Party released its manifesto the week after the election……

      (actually one could argue that people voted for Muldoon in the first place to cope with that “loss of trade with Britain”. He and his govt did a fair amount, under v adverse circumstances, but then lost it quite badly in key areas in the second half of their time in government. )


      • I did think that Helen Clarke and Michael Cullen went against the UN Charter for indigenous rights on Foreshore and Seabed and was therefore quite revolutionary. Labour under Andrew Little is a problem for white middle aged men.

        “Labour candidate drops out, saying ‘no chance for white, middle-class men’ in the party. Rohan Lord withdrew saying it seemed there was “no chance for white middle class men” in Labour. Rohan Lord, a former America’s Cup sailor and Olympic sailing coach, withdrew as a candidate because of his list ranking at 72.”

        Liked by 1 person

  5. Good analysis. Sadly it seems NZ gets the politicians it deserves, because despite National’s poor performance, they still are polling quite well. I’m not convinced Labour is that much better, yes they might tinker here and there, but their approach to tackling problems seems to be half-hearted and doesn’t involve significant changes. Maybe that is the major issue, it doesn’t matter who you vote for because you are going to end up with a bunch of clowns. Still you would think significant levels of disillusionment with the current government would set in.


    • When most of us have good paying jobs that puts good food on the table and increasing wealth from our businesses, share portfolios and property, it is no wonder that National is polling well.

      I was a bit concerned with my 26 year old niece when she quit her $50k job to go travel in South East Asia bumming around for 6 months and then coming home to NZ and rejecting two $50k job offers to now secure a $80k job. Salaries are certainly moving upwards fast.


      • Polling well? In David Farrar’s rolling poll of polls National sits at 43% and Labour + Greens at 42.5%. This time 3 years ago, National was nearer 50%.

        They certainly don’t look likely to face a wipe-out (although things can move a lot, either way, in the next 4 mths), but it is hard to avoid that conclusion that which party governs will depends on the Peters choice.

        Liked by 1 person

      • The 50% polling was mainly due to a John Key effect. For some strange reason Kiwis gravitate towards him even with all that pony tail pulling and inability to wield a hammer to get a nail into a post. I think its all that “Love a nerd today as he could end up as your future boss” type jokes.


      • By polling well I mean relative to other parties, they are still the most popular party by a large margin. It is very surprising given their bad performance over the last 9 years. I don’t think most people have good paying jobs (especially not relative to costs such as housing). Also there is no objective evidence that salaries are moving upwards fast. One anecdote about your niece doesn’t prove anything. The majority of NZers are not property speculators nor do they have large share portfolios.

        Liked by 1 person

      • There are 290,000 property investors. There are 1.5 million house owners. The rest of New Zelanders are wannabe property investors either to live or as an investment. That makes a majority.


    • I think National have maintained their position due to weak leadership from Andrew Little. His fence sitting has made him seem like a very tepid alternative. Labour need to give him the heave-ho as soon after the election as they practically can.

      Watching Jacinda speak the other day has convinced me she is just as capable as he is. More importantly, she will be able to “sell” reforms that Little has no chance of, due to her charisma and “mana”.

      The other big factor is fear of house prices dropping.

      The way things are tracking currently, I think Winston is far more likely choose Labour than he was a few months ago, and that decision will decide the election.


      • Not so easy to change a Labour leader these days. You need Unions to agree to the change. Anyway Jacinta is also a career politician with zero real work experience. Struggle to even know what working is all about. Every issue with Jacinta is I think so because I do not know so as my experience is terribly so so.


  6. Exports as a share of GDP is a very poor measure of performance because the export GDP related to Tourism and International students being service industries flow directly into the local communities at a almost 100% disposable income spending into Local GDP. Therefore the higher the export GDP there is a direct proportionate increase in Local GDP

    Export GDP associated with meat, milk, wine etc would only result in only around 30% disposable income spending into Local GDP. Therefore Export GDP of this agricultural nature results in less than 30% increase in Local GDP. which is really not that good from a local GDP perspective.


  7. You can’t blame the government for land use restrictions. You have to blame Nimby groups and you have to blame all this pandering that is going on with Maori affairs and Maori issue. Most of central Auckland remains low rise due to the Waitakere Ranges where there are thousands of Kauri trees and 57 sacred Maori mounts. In most cities, Mt Eden, Mt Roskill, One Tree Hill etc would have been levelled for cheaper roading and building material and high rise apartment towers built, thats why 3 Kings have a big hole in the ground. It is called a quarry.. In Auckland these mounts are now preserved which equates to expensive low rise and low density housing.


  8. Labour with Grant Robertson is really struggling to have any relevant discussions or alternative policy response to National’s budget. It’s a no show on the TV3 The Nation today after promising to show up and then declining an invitation to front. Sure signs that they are just not ready to form a government.


    • I suspect it is more a matter of head down working with spreadsheets to determine whether or not they can support the tax cuts and WFF amendments announced and still provide support for their existing (and already budgeted) proposals. Until they have an answer to that question – which is SURE to be asked – it’s rather useless to appear and say, “we still don’t have an answer to that”. But it will be interesting when they do – as the bracket movement really did need happen in order for them to be fairly inflation adjusted. Should just happen automatically.


      • I don’t agree with automatic indexation.

        But circumstances can change unexpectedly.

        Like you, I consider adjustment is well overdue in the current environment. I also consider the current government was aware of the building pressure to adjust, but saved it up for election year. Fair enough, politics is a tough game.

        But automatic indexation embedded in old style labour agreements was a disaster during the stagflation period of the 1970s.

        Its a useful tool to support the central bank if used wisely.

        This government simply, and sadly, doesn’t place a high priority on achieving our inflation target and has enjoyed the luxury of natural disasters and record immigration to shield its economic incompetence – basically falling victim to the paradox of thrift, but escaping purely by luck.


      • Grant Robertson finally gathered enough courage and fronted together with James Shaw on TVNZ Q&A. His reply to National’s budget was,

        1. New Zealanders on a higher tax would not get a tax cut. Instead that money goes to education and to R&D.
        2. He and James Shaw agreed that Working for families increment was good. Even though earlier in the week they had opposing opinions with James Shaw supporting the governments increments in this area.
        3. He brought up Labour kiwibuild programme ie building more houses but does not identify where and where the budget is coming from and where the additional workers are going to come from when the industry is already stretched and Andrew Little cutting tens of thousands of foreign workers from the build.
        4. He brings up his silly point about taxing speculators when there is already a 2 year Bright Line Test on speculators.

        Again very light on details which points to no idea how.

        There is no mention of increasing employer superannuation so that employees benefit. Or at least get it back on track in accordance to the Michael Cullen track of 5% employer contribution.

        There is no mention of recognition of the NZ land wars as a public holiday.


  9. I was quite surprised today on TVNZ Q&A how out of touch Dr Jennifer Curtin was when she identified her “miss” on the National budget was no extra money for the international student export sector. In the months leading up to the budget, the big issue was too many students providing low cost casual labour as well as the governments tightening of skilled migrants category under public opinion pressure.

    Shamubeel Eaqub launched himself into the immigration debate ahead of Kerry MacDonald perhaps trying to grab the media soap box making the same silly mistake of not knowing where to cut. Rather a childish when you should know by now that immigration consists of international students, foreign workers and New Zealanders deciding not to go and the future immigration issue will be more about the 650,000 New Zealanders under considerable pressure in Australia as dirt class people to return to NZ.

    Kerry MacDonald tries to make a case of higher productivity equating to higher wages when he well knows that the highest productivity equates to fewer jobs for New Zealanders and robots doing all the work and New Zealaders wealth in the hands of a few shareholders of the most productive companies without any workers. He also tries to link dirty waterways with increased population when everyone knows dirty waterways is due to 10 million cows dropping their waste unmanaged all over the countryside.

    Unbelievable how poor the Q&A panel was.


    • It won’t surprise you that I thought McDonald was very good. In some ways the most telling comment of the programme was to hear Kerry McDonald – a pillar of the business and econ establishment for decades – praising Winston Peters and referring viewers to one of Peters’ recent speeches. (When I went and checked the speech, I wasn’t that impressed, but the point is the surprise that the comment was made at all. Hard to imagine that 20 years ago.


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