Losing $128 billion

I don’t usually pay much attention to forecasts of nominal GDP.  Not many people in New Zealand really seem to.  But The Treasury takes nominal GDP forecasts more seriously than most, since nominal GDP (in aggregate) is, more or less, the tax base.

Out of little more than idle curiosity I dug out the numbers from last December’s HYEFU forecasts –  the last before the coronavirus –  and compared them to the numbers published in last week’s BEFU, accompanying the Budget.  And this was what I found.

Nominal GDP ($bn)
HYEFU BEFU Difference
2019/20 319.8 294.2 -25.6
2020/21 336.4 294.2 -42.2
2021/22 354.1 328.3 -25.8
2022/23 371.5 352.3 -19.2
2023/24 389.2 374.3 -14.9
Total 1771 1643.3 -127.7

Over the full five years, New Zealand’s nominal GDP is projected to be $128 billion less than The Treasury thought only a few months ago.

Recall that changes in nominal GDP can be broken down into three broad components:

  • the change in real GDP  (the volume of stuff produced here),
  • the change in the general price level (inflation), and
  • the terms of trade

On this occasion, changes in the terms of trade make only a tiny difference over the five years taken together.

General (CPI) inflation is expected to be lower than previously thought.    On average over the five years, the price level in the BEFU forecasts is about 1.8 per cent lower than in the HYEFU forecasts.  That accounts for about $33 billion in lost nominal GDP.

The balance –  the overwhelming bulk of the loss –  is real GDP.

I haven’t written anything much about The Treasury’s forecasts, which were done quite a while ago, and could not fully incorporate the final fiscal decisions the government made.  But for what it is worth, I reckon Treasury’s numbers were on the optimistic side –  quite possibly on all three components of nominal GDP.  On inflation, for example, they are more optimistic than the Reserve Bank (which finished its forecasts later), even as they assume tighter monetary conditions than the Bank does.

But the point I really wanted to make was that these forecast GDP losses will never be made back (in the sense that some future year will be higher to compensate –  resources not used this year mostly represents a permanent loss of wealth).  And that these losses occur despite all the fiscal support (and rather limited monetary support).   And fiscal here includes both the effects of the automatic stabilisers (mainly lower tax revenue as the economy shrinks) and the discretionary policy initiatives (temporary and permanent).

How large are those fiscal numbers?  Well, here is core Crown revenue (more than 90 per cent of which is tax)

Core Crown revenue ($bn)
HYEFU BEFU Difference
2019/20 95.8 89.5 -6.3
2020/21 101.6 87 -14.6
2021/22 106.5 94.6 -11.9
2022/23 112.7 104 -8.7
2023/24 117.7 109.9 -7.8
534.3 485 -49.3

Almost $50 billion the Crown was expecting but which it won’t now receive.  Some of that will be the result of discretionary initiatives –  the corporate tax clawback scheme, much of which will result in permanent losses, and the business tax changes announced in the 17 March package –  but the bulk of the loss will be the automatic stabilisers at work.

And on the expenditure side?

Core Crown expenses ($bn)
HYEFU BEFU Difference
2019/20 93.8 114 20.2
2020/21 98.8 113.5 14.7
2021/22 102 119.8 17.8
2022/23 106.3 118.6 12.3
2023/24 109.2 113 3.8
Total 510.1 578.9 68.8

Almost $70 billion of current spending the Crown didn’t expect to make only a few months ago.  A small amount of this will be the automatic stabilisers at work (the unemployment benefit), but The Treasury is pretty optimistic about unemployment.  Most of the change is discretionary policy initiatives (announced or provided for).

And here is the change in net debt

Net core Crown debt (incl NZSF) as at year end  ($bn)
2018/19 14.1 14.1
2019/20 14.6 47.6
2020/21 17.6 82.8
2021/22 17.1 111.7
2022/23 12.3 131.7
2023/24 3.9 138.2 134.3

That will be almost $135 billion higher than expected.

As I’ve noted in earlier posts, I don’t have too much problem with the extent of overall fiscal support (although I would have structured it differently and made it more frontloaded –  consistent with the “pandemic insurance” model).

But even on this scale, fiscal policy is nowhere near enough to stop the losses.  Some of those losses are now unavoidable.  It is only five weeks until the end of 2019/2020, so we can treat $26 billion of nominal GDP losses (see first table) as water under the bridge now.   As it happens, fiscal policy looks to have more than fully “replaced” the income loss in aggregate (whether $27 billion from operating revenue and expenses in combination, or the $33 billion increase in net debt) –  not as windfall, but as borrowing (narrowing future choices).   (UPDATE: Even in quote marks “replaced” isn’t really quite right there, as without the fiscal initiatives it is near-certain that actual nominal GDP would have been at least a bit lower than The Treasury now forecasts, even for 19/20.)

But there is a great deal of lost income/output ahead of us, even on these (relatively optimistic) Treasury numbers.

Which is really where monetary policy should be coming in.   The Treasury assumes that monetary policy does almost nothing: there is no further fall in the 90 day rate (the variable they forecast), and as they will recognise as well as anyone inflation expectations have fallen, so real rates are little changed from where they were at the start of the year.  And although the exchange rate is lower throughout than they assumed in the HYEFU, the difference is less than 5 per cent –  better than nothing of course, but tiny by comparison with exchange rate adjustments that have been part of previous recoveries.  It isn’t entirely clear how The Treasury has allowed for the LSAP bond purchase programme, but whatever effect they are assuming…….there is still a great deal of lost output.

The Governor has often been heard calling for banks –  private businesses – to be “courageous”.  It is never quite clear what he means, but he apparently wants to risk other peoples’ money.  But the central bank is ours –  a public institution.   A courageous central bank, that had really grasped the likely severity of this slump, could have begun to make a real difference.  If they’d cut the OCR back in February, and taken steps to ensure that large amounts of deposits couldn’t be converted to physical cash, and then cut the OCR to deeply negative levels (perhaps – 5 per cent) as the full horror dawned, we’d be in a much better position now looking ahead.     Wholesale lending and deposit rates would be substantially negative at the short end, and even real rates on longer-term assets might be as low as they now, without much need for bond purchases.   Retail rates might also in many case be modestly negative –  perhaps for small depositors achieved through fees.   And, almost certainly, the exchange rate would have fallen a long way, assisting in the stabilisation and recovery goal.  There are winners and losers from such steps –  as there are from any interventions, or from choices just to sit to the sidelines –  but it is really just conventional macroeconomics: in a time of serious excess capacity and falling inflation expectations, act to seek to bring domestic demand forward, and net demand towards New Zealand producers.    Working hand in hand with the substantial fiscal support (see above), we’d be hugely better positioned to minimise those large future nominal GDP losses –  losses that at present, we risk never making back.

But neither the Governor nor, apparently, the Minister of Finance seem bothered.

Finally, if nominal GDP appears to be a slightly abstract thing, it is worth recalling that almost all debt is nominal and it is nominal incomes that support outstanding debt.  There is about $500 billion of (intermediated) Private Sector Credit at present (and some other private credit on top of that).  Most likely that stock won’t grow much over the next few years. But government debt will –  on Treasury’s numbers net debt rises by $134 billion.   Against those stocks, a cumulative loss of nominal GDP of $128 billion over five years is no small loss.  As noted earlier, amid all the uncertainties, the precise numbers are only illustrative, but the broad magnitude of the likely losses (on current policies) are what –  and that magnitude is large, if anything perhaps understated on The Treasury’s numbers.


26 thoughts on “Losing $128 billion

  1. It is easier to confuse a million with a billion than say 5 with 10. So with big NZ figures I divide by our population and $25,000 is rather large for a middle class person but I can imagine selling my wife’s car and my own car and that $25,000 springs to life and walking to the buses will probably do us good. Then I realised that is $25,000 per person not family so it includes $25,000 for my 3 month old grandson and another $25,000 for my 3 year old granddaughter, etc. Most of the adults in my family cannot put their hand on that kind of money even with five years to do so.
    I’m typical – if a dollar had rolled under the armchair I’d curse and sweat trying to retrieve it but somehow this news is less immediately concerning.


  2. May I ask a question on the ‘loss of wealth’ comment: does that relate to the drop in output and the portion that won’t be invested into physical capital? Always in a muddle over the terms wealth, capital accumulation and saving….!!


    • No, in this case it is simply $128bn that will be never earned (poorer than Tsy expected we would be). Of course, much of the $128bn would have been consumed, but in a lifetime sense our overall consumption opportunities are less than they were.

      A caveat to the post is that some portion of the $128bn would have been earned by new migrant, some of whom may be unable to come. From what I can see of the Tsy tables/charts, it is impossible to tell how large a share that would make up, but since Tsy assume that by the end of the period total real GDP is back to the previous (HYEFU) track level, it is unlikely to be a large proportion over the full five years.

      Liked by 1 person

  3. From this day on all immigration should be restricted to migrants who have a record in business and can commit to establishing a business here in NZ and employing people. A commitment that is reviewed after 5 years. If it hasn’t happened, and/or its not profitable, their visa is withdrawn

    Liked by 2 people

      • I’m talking about “serious” businesses that provides jobs for local people paying $50,000 per annum. Those $2 shops and new ethnic start-up takeaways employing family are simply shams. With a 5 year review on the existence of the business down the track, audit of the payroll records there probably wouldn’t be too many takers which proves the point of the exercise


    • I disagree with you. A foreigner can simply buy an existing business and not care how well it is run. That was happening when I first spoke to a NZ immigration advisor (2003) – after my expressing a desire to live in NZ he responded with “we will help you write a business plan”. Later I met a Kiwi selling either car tyres of exhausts and politely asked him about his business plans and he replied “Oh I’m not interested in car parts I just start a business, run it for a couple of years and then sell it to an Asian wanting NZ residency; I’ve done it a couple of times”. I suspect INZ are less naive these days.
      I’m in favour of immigration and even immigration from a diverse range of places but only with numbers in line with Mr Reddell’s proposed reduction by two thirds. That is still quite high but would not put so many strains on our economy. I would choose immigrants who are well paid or alternatively and much the same thing immigrants whose employer is willing to pay a substantial annual work visa fee.
      I’ve been looking at the INZ immigration data and it is clear the occupation we are going for now is workers in care homes; figures for retail manager, chef and tourist guide have slumped since Labour came to power. GGS is very fond of care-givers and the Covid-19 epidemic has made us all appreciate how essential their work is however I would prefer the majority of positions filled by Kiwis and since wages are effectively controlled by the govt (see recent article in NZ Herald) now is the time for our govt to act.
      There are other countries that ensure no area of employment is dominated by immigrants by restricting visa approvals appropriately and that makes sense.


    • This is the reality & white buses parked up everywhere receiving wage subsidy.
      Why elderly parents?
      CEO Immigration NZ
      “Overall the net benefit of the highly skilled out weighs the costs of the parents. And quite frankly bring the parents is one of the factors we used to attract skilled migrants.” Nigel Latta The Hard Stuff



  4. for the last 3 weeks Social Media and Talkback Radio has been running hot with dissatisfaction about loss of civil rights and civil liberties arising out of the lock-down at levels 4 and subsequently 3. Including the maori roadblocks. The extent of it and the viciousness of the attitudes has been surprising. If that is anything to go by any attempt by the government to restrict cash withdrawals from banks will not be accepted mildly

    Liked by 1 person

    • Just to be clear I’m not suggesting restricting access to physical cash, but just pricing it (particularly for very large transactions). The concern isn’t mostly the individual in the street but pension funds, hedge funds etc converting $100m or even $1bn from deposits or govt bonds into physical cash. As things stand, it would probably be worth them doing so once the OCR got beyond about -1 per cent. An exchange fee – akin to the fee to convert NZD into AUD – would overcome that risk and enable an effective further lowering of the OCR, and with it retail rates and the exchange rate.


  5. I’ve been looking at the INZ immigration data and it is clear the occupation we are going for now is workers in care homes; figures for retail manager, chef and tourist guide have slumped since Labour came to power.

    Perhaps a question should be asked here…

    Why a country of 5 million inhabitants with 7 universities and 16 polytechnics should even consider the necessity for “skilled occupation” immigration schemes? What purpose do all these educational institutions actually exist for, if tens of thousands of “skilled immigrants” still have to be imported every year?

    Liked by 1 person

    • Our institutions deliver highly skilled New Zealanders but those jobs are few in NZ but plentiful overseas. So our young leave to work overseas. Our industries are mainly low skilled labour requirements and that’s why we bring in lower skilled migrants.


      • Our industries have also been allowed to stay reliant on low wage workers due to the ease of access. Slow this down and this will force them to either invest in having more productive staff or go out of business. Either result would be long term benefit to the country.


      • Gissie, your comment seems rather out of dare. If you have not noticed, we have stopped one of the major cause of our low skilled labour malaise, foreign tourists. The outcome has been the current GDP loss of $128 billion and going forward likely $30 billion GDP loss. We have no industries that can replace that loss.


      • Our institutions actually deliver highly educated New Zealanders (and migrants). Most skills are (not learned but) developed on the job. there is a difference.


  6. I disagree that your proposals are “conventional” or “standard” macroeconomic fare. What you are proposing is radical and you can’t know whether the scenario you painted from setting interest rates to -5% would pan out as you claim or what other effects there might have been. The policy is untried and dangerous with potentially disastrous consequences that you haven’t acknowledged beyond the fact that there will be “winners and losers”.

    Having tried at length, largely without success, to get you to engage with arguments surrounding the societal and economic costs associated with your polices, let me at least remind your readers what some of these risks and costs could be, and what they could look like for the “losers”.

    1. Michael has himself conceded: he doesn’t know how a “deeply negative” rate would pan out, to quote him in reply to me on another article: “since no one has broken thru to deeply negative rates we can’t know how that would work.”

    2. Just last week the chair of the US Fed Powell reiterated the (unanimous) view of the FOMC (US MPC) that negative rates were *not* appropriate or useful: ”there is no clear finding that it actually does support economic activity on net…it introduces distortions into the financial system which I think offset that”.

    The Australian Reserve Bank and Bank of Canada appear to concur, with both having no intention of taking their rates negative (their policy rates are both, like ours at 0.25%). The BOE has said negative rates aren’t being “planned or contemplated”.

    3. It is not just the other central banks – most market economists seem to be sceptical about the benefits of negative rates in the current environment

    4. The interest income of savers, already suffering, will fall further. Orr claimed recently that with interest rates much below -1% banks would be in the position of charging depositors for holding cash and other funds held with them. This seems perverse.

    5. The sensitivity of house prices to interest rate falls and in the absence of LVRs is likely to further encourage investment in property and away from productive assets;

    Exchange rate effects
    The exchange rate falls “significantly”, “a long way” – this a crucial part of the plan because it is hoped to set off a round of economic restructuring “rebalancing” away from import oriented businesses towards export-oriented businesses. That’s right. He implicitly wants to hit businesses, firms, families emerging from Covid with another financial blow: an inflationary shock to consumers’ disposable income and business’ cash flows. For the losers this means this means a drop in disposable income, and bankruptcies for firms who can’t survive the low exchange rate.

    Michael hasn’t quantified the fall he thinks is necessary but let’s assume it’s in the region of 30-40%. Also note that the TWI has already fallen around 16% since the 2014 peak, while the NZD/USD has fallen 30%.

    1. As noted, imported inflation would rise, probably quite considerably and inflation would almost certainly feed into other parts of the economy. That is a hit to every consumer’s disposable income to the extent they consume overseas goods and services.
    2. imported inflation causes a financial hit to every business (including exporters use of imported intermediate goods) that use imported products and capital goods with the impact being reflected in either reduced margins or higher prices. Which leads to lower demand for their goods – in an environment already depressed from Covid). Expect numerous business failures.
    3. To the extent that the exchange rate is affected, negative rates will increase the value of NZ’s overseas debt
    4. A further weakening of business and consumer confidence since a weaker exchange rate makes us legitimately feel relatively poorer.
    5. The people who can and who get in fast enough will shift all, or as much as possible of their wealth off-shore
    6. The lower paid will be hit disproportionately harder.

    So when he says “the exchange rate would have fallen a long way, assisting in the stabilisation and recovery goal.” I think that is debatable. The immediate short-term effects will be those in (1) – (6), and these will hit large swaths of the economy. By “stabilisation” he means rebalancing production from imports towards exports. The presumption I think is that those affected by a crashed exchange rate (remember this includes firms already trying to recover from the Covid shock) will go broke. If the rebalancing does happen it will likely be gradual (medium term) it won’t be immediate, due to lags. So I don’t see that this will unambiguously support employment or the recovery in the short term in the way he claims. In the short-term I would expect businesses failures.

    Finally, I asked Michael if there were any other countries who were approaching their economic recovery from Covid using the monetary policy prescriptions Michael is relentlessly advocating here (greatly weakening the exchange rate through deeply negative interest rates in order to initiate economic restructuring). No examples were given.


    • We’ve gone round these issues and variants of them on numerous occasions, and I may pick up some of the concerns you raise in future posts.

      For now, I would simply note that while you are highly critical of attempting to use monetary policy to accelerate a return to full employment and target inflation, but you outline no alternative. It isn’t as if the status quo has no problems.

      Incidentally, I was interested to see Orr in this address https://www.jarden.co.nz/news-and-insights/post-mps-breakfast-discussion-with-rbnz-governor-adrian-orr/
      note that the RBA Governor’s opposition to negative rates appeared to be based on no analysis at all, at least none that had seen the light of day.


      • Listened to RNZ 101.4 yesterday that the local Tattoo shops in Auckland have seen a better than average increase in clientele. Also speaking to some of my regular lunch sushi outlets, their business has rebounded strongly. The local property investor group on FB are reporting sales enquiry and sales are picking up. My niece and her husband, first home buyers are finding that properties in Auckland are selling faster through zoom than they have a chance to even have a chance to physically view the properties.

        Rents continue to be rather stable. All 11 of of my residential investment properties in Auckland and the Waikato are fully tenanted and rents paid in full. Took a 20% pay cut to a 4 day week at my job but at $160k from $200k before lockdown, I am still quite comfortable.


      • You seem to have hardly gone around these issues at all and have barely conceded that there are a lot of people who are already suffering Covid fallout who would suffer another blow with a -5% interest rate and a crashed exchange rate. You aren’t talking about mildly negative rates but deeply negative rates. As far as I’m aware you haven’t offered any empirical evidence that using monetary policy via deeply negative rates will “accelerate a return to full employment”, and no other country has taken this path. I have suggested that in the short term the effect of such a radical move would likely be lower employment and higher inflation, actually constraining the recovery.

        The “status quo” has seen massive and continuing fiscal and monetary intervention and I suspect most would agree that is sufficient for now. In my view further moves should be based upon the evolving situation given the many uncertainties. Perhaps I am “highly critical” of the way you would use monetary policy, not the way it has been used to date. The possibility of a lower inflation rate seems a bizarre thing to be worrying about in the current environment.


      • To be clear, an OCR of -5% would prob mean deposit rates modestly negative (perhaps -2%) and lending rates perhaps around zero. There are winners and losers in a static sense in all changes in interest rates and exch rates. The question is whether there are net useful behavioural changes as a result, bringing demand forward (int rates) or towards NZ (exch rate). I think the case is pretty clear – or would be to most if we were starting with, say, a 10% inflation target and an OCR at 0.25 per cent.

        As for the status quo, if you are content with it that is, obviously, your choice. I’m very worried about the likely persistence of high unemployment (it was bad enough after the last recession) and the loss of “wellbeing” (for want of a better word) that accompanies that.

        As for the inflation rate, as you know (we’ve gone round this various times before) one of the main issues is that if inflation and inflation expectations fall further, OCR etc unchanged, real interest rates will rise. I’m pretty sure no one would recommend that as the macro prescription at present.


  7. The Press has an article by Simon Draper praising globalisation and a Lana Hart saying we are empty and should have 10 million people. They don’t tell us who she works for (Canterbury Employers Chamber of Commerce).


  8. You don’t foresee that deposit rates of -2% would be stressful and affect saver’s well-being? Who wants to lend at 0%? Aren’t there dangers here for borrowers are going to be tempted to take on debt for risky investments and savers likewise as they look for higher riskier returns? Like the Fed intimated wouldn’t it create distorted economic signals? (If you have already addressed these concerns in another post happy for you to point me to the relevant article, thanks)

    My greater immediate concern is for the well-being of people unemployed in the short-term, particularly those additionally made unemployed not as a result of Covid but as a result of the structural changes to the economy you appear to want to initiate through having a much lower exchange rate.


    • Institutions will want to lend at 0% if funding costs are lower than that. Individuals will either want to lend (to banks) at zero or below because they value safe-keeping of their funds, or they won’t (in which case, they will spend, buy assets, buy fx, all of which tend to support NZ econ activity). In this climate, we want people to take a few more risks (it is intrinsic to recovery) – in fact, it is what the Governor urges banks to do.

      Yes, depositors will lament lower/negative rates…..as they did when the OCR fell frrom 8.25% to 2.5%. It is tough on them, but they voluntarily signed up to contracts envisaging that the return on their deposits will reprice every few months (few opt for 5 year fixed rate deposits, even though banks offer those terms).


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