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MICHAEL REDDELL: Not very bothered by deficits

I was away last week so have been rather late in getting to the Budget Policy Statement and associated material released last Wednesday. It does not make for pleasant reading, at least if one cares at all about governments not borrowing to pay for the groceries.

Once upon a time – still not that long ago – New Zealand had a fairly enviable fiscal record. This chart, comparing New Zealand and the median advanced country, draws from data published in the IMF’s last World Economic Outlook:

We used to have smaller deficits or larger surpluses than the typical other advanced countries (consistent with that our net public debt as a share of GDP was materially lower than the median advanced country). But no longer.

Using data from the same WEO (which, incidentally, was published before our election in October), on the IMF’s estimates we had one of the very largest structural fiscal deficits of any of the advanced countries.

Structural deficits – by definition – do not go away of their own accord as the cyclical position of the economy improves. They are removed only by conscious and deliberate choices by governments, and – by the same token – if they are left to linger that is a conscious and deliberate choice by a government.

There wasn’t even a hint of this starting position in any of the material released last week (although they did mention an international comparison of the increase in net debt over the Covid period). And consistent with that, there is very little about eliminating the structural deficit or getting back to operating balance/surplus. In her BPS the Minister outlines several priorities for the coming Budget, but none of them involves any priority or emphasis on getting the structural deficit down. The current government inherited the deficit, but if they choose to continue to run structural deficits – which aren’t about the cyclical state of the economy – the responsibility is on them, quite as much as it was on their predecessors when they chose to continue to run structural deficits once the heavy Covid spending was behind them. If it was pretty irresponsible then, it isn’t much better now.

Consistent with this overall approach, the Prime Minister has this morning released an “action plan” for the next three months, a period which includes the Budget. There is not even a vague suggestion in that list that closing the deficit is any sort of priority for the government.

Under the previous government the forecast date for a return to surplus kept getting pushed back. And this government now seems to be engaged in the same game – the fiscal version of the old line from St Augustine (“grant me chastity and continence but not yet”) – and whatever numbers finally emerge in the Budget projections should probably be accorded no more weight than when the Treasury produced (eventual) surplus forecasts under Labour. It might be nice to be back to surplus by whatever the next published horizon is but….don’t hold us to it. Much more important to keep funding the baubles that both Labour and National competed to offer last year.

Much of the Minister of Finance’s rhetoric in recent months has seemed designed to convey a sense that structural deficits are things that just happen and that ministers can affect only at the margin. That wasn’t so under Labour – when Grant Robertson chose to run substantial structural deficits – and it is no more so under the current government. It is simply a policy choice, and a bad one, especially when there is no particular besetting crisis. She talks about the difficulty on the projections of getting back to surplus by a particular date, but the issue isn’t projections – especially when the economy operates fairly close to capacity – but choices, political choices. It might be particularly challenging for a government to take the budget from substantial deficit to balance in its first year, but over a two or three year horizon it really is pure choice. If we still run structural deficits by, say, 2025/26 that is purely a policy choice by the current government, for which responsibility will rest wholly on them.

The Minister appears to attempt to cover herself from this sort of critique using this line, which I saw twice in the documents she released: “International evidence is that reducing deficits is best done over the course of several years by focusing on structural reforms to expenditure and revenue settings”.

Which might sound good but (a) there are no footnotes or references to support this claim of “international evidence”, and (b) there isn’t anything much specific about these “structural reforms” (at present the focus of fiscal policy seems to be on finding enough spending savings to fund tax cuts and other giveaways, rather than on a actually reducing the deficit). I’m rather sceptical of the claim. It might have a little merit in an economy in a deep recession with monetary policy constrained by the effective lower bound on nominal interest rates, but…..that very much isn’t the world New Zealand fiscal authorities now face. Instead, the line just feels like an unsupported excuse for a few more years of deficits (“they had them so why shouldn’t we?”).

The Minister has also been making quite a play of a story that it has all gotten so much harder than she had envisaged because the economy has been deteriorating. At present that seems a dramatically overblown story, designed to distract more than to enlighten.

Much is made of the revisions downward late last year in the level of real GDP (and thus the level of labour productivity). But that is mostly distraction because before those numbers came out Treasury and IRD already knew how much tax revenue the economy had been generating. All they didn’t know was the latest macroeconomic estimates of the size of GDP itself. That matters for, eg, nice charts of tax/GDP ratios but not very obviously for making sense of the fiscal situation and its challenges.

Some weeks ago I showed this graph on Twitter, showing the Reserve Bank’s latest nominal GDP forecasts against those the Bank produced in August last year (ie the last projections before the election).

The Reserve Bank reckoned in February that, if anything, nominal GDP would be a little higher than they’d thought just prior to the election. And while nominal GDP tends not to be a big point of focus for the RB in putting together its forecasts, the Secretary to the Treasury (or her senior delegate) does actually sit on the MPC.

What about real GDP? Well, as we know, there were some downward revisions to the historical data, so in this chart we will focus on forecast real GDP growth, using as the base date the March quarter of last year (the latest actual data the RB had when it did its last pre-election projections):

Those are pretty tiny differences. And, after all, the Reserve Bank had been telling everyone – including the then Opposition – that the economy was going through a tough patch as part of getting inflation back down.

Among the material released last week was a four page Treasury note on the economic and tax outlook. It contains some preliminary high level forecasts, but can’t be directly lined up against the Reserve Bank numbers because there is no quarterly track for nominal GDP (the best proxy for the tax base). It appears from Treasury’s annual forecasts that they are running with a lower nominal GDP track than the Reserve Bank has (perhaps by around 2 per cent), although it isn’t clear quite why (and although the documents note a revision downwards in inflation forecasts, the Treasury inflation forecasts for the first year or so still seem higher than those of the Reserve Bank).

In terms of spinning a story around the deficit this is perhaps the paragraph the Minister will have been most keen to have readers pay attention to.

You are meant to take away from this that it is going to be so much harder than the current government had thought last year when they were in Opposition, to get back to balance by 2026/27 (recall, a date already pushed out under Labour). But there are a few crucial words in that excerpt: “all else equal”.

And they aren’t (of course). When the size of the nominal economy is smaller than previously expected – but still operating at around capacity (and the Treasury preliminary forecasts have unemployment by 2025/26 and beyond around their estimate of the NAIRU) – it isn’t just revenue projections that need to change. So will many spending obligations – both statutory things like indexed benefits (remember, Treasury has revised down its inflation forecasts since late last year) but also expected wage inflation (in the private sector but also in the public sector). Economies with a dreadful productivity growth record – and the productivity assumptions in these forecasts seem likely to be very weak indeed – tend not to support large wage increases. Of course, there are other items in government spending where there are no semi-automatic savings, but the weak productivity story doesn’t seem to be just a New Zealand phenomenon at present. (More generally, of course, all medium-term economic forecasts – RB, Treasury, IMF, or whoever – are subject to huge margins of error, and not worth a lot more than the paper they are printed on.)

Being in surplus two to three years hence (or not) is purely a political policy choice. It is a bad one. (Of course, in the meantime some really bad event could hit – earthquakes, deep global recessions or whatever – but since no one can or does pick the timing of those we can worry about them when and if they hit.) At the moment, planning proceeds on the basis of an economy developing fairly routinely (if underwhelmingly).

I’m old enough to remember when a National government and Minister of Finance first got New Zealand back to operating surplus in the mid 1990s. I’ve told stories about what seemed to have been bipartisan commitment to get back to surplus fairly promptly when occasional nasty shocks happened (although in truth it was really tested only once). It is disheartening now to see little sign that National (and their coalition government) is any more bothered about deficits – borrowing to pay for the groceries – than their Labour predecessors were. (The new debt target enunciated in the BPS is no more encouraging, with the new government seemingly willing to settle for higher levels of (net) debt than New Zealand has averaged over the last 25 years, with no evidence of strong potential productivity growth that might compellingly justify such debt.)

UPDATE: Incidentally, I saw in the weekend papers (page 3 of Saturday’s Post) one academic economist defending the government’s fiscal approach as classic supply-side economics. I don’t find that claim at all persuasive. There are certainly elements in the fiscal grab-bag that might fit that bill (one could think of restoring interest deductibility to rental property owners, on the same basis as any other business in New Zealand). In the abstract, lower income tax rates might, were it not for the fact the starting position is one of a deficit. Spending savings can be used to cut the deficit or for tax cuts, but tax cuts today with a structural deficit – all else equal – just mean either further cuts to spending or higher taxes in the future. And some of National’s policies are distinctly retrograde even with a supply-side focus in mind – one could think, for example, of the policy both they and Labour campaigned on, the elimination of depreciation for tax purposes in respect of commercial buildings (office, factories, warehouses). Simply a freshly distortionary revenue grab. And meanwhile we run one of the highest company tax rates in the OECD with not even a suggestion the government is interested in addressing that.

Michael Reddell spent 30+ years doing economic analysis and policy advice in a range of institutions, in New Zealand and overseas. Most of that time was at the Reserve Bank, where he ran a number of areas, including a spell as Head of Financial Markets, responsible for monetary policy implementation, foreign reserves management, and the analysis of financial system risks. Michael blogs at Croaking Cassandra

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New Zealand used to be a great country based on our attitude with many of our forefathers suffering great hardships as immigrants to create the country and wealth drivers we rely on today.

Up until the late 19oos when we joined the IMF and gave away the subsidies and started the asset stripping of the 80s, ok so in some ways were were living in an artificial world, but one that could have reacted much better than the way we did to employing the neo liberal economic theories that shafted us there and then.

New Zealand still had a great social conscience politically offset by a very strong primary sector (albeit lazy take the head and hooves off and ship…

Replying to

I get exactly what you are saying.

The problem is we can't just drop the pie and return to type.

I would love nothing more than to return to my days as a country where we did manufacture and produce, but the level of automation and the output required to make that viable again? No. Not in new Zealand. It's an insane amount of investment needed to produce what we can't, because we simply don't have the manpower and labour to so so. Niche products and clever engineering, advanced practices in farming and promoting what we've got is it I'm.afraid. but that can be exploited and made relevant if government gets behind us, look.

I'll give you an example.



Is this govt going to rein in the corporate welfare that is immigration. Bringing in 100,000+ people a year and then loading the costs of absorbing these people (a city the size of Palmerston Nth) every year onto ratepayers is madness and extremely unfair. If you want immigrants to staff your business, pay the $50,000+ infrastructure each that it costs to absorb them into the economy. Do we advertise in India for immigrants to operate vape shops, service stations, corner dairies, liquor stores, pizza places cafe's, call centre's, or do they get in here on other qualification and then change when they get here, student visas seems to be a a good ruse. I mention Indians, because they are the…

Replying to

Immigrants are mainly fine people who are wanting a better future for themselves and their children. In reality, New Zealand is a nation of immigrants and descendent of ancestors who came from somewhere else. The problem we have is not immigrants but the rate of immigration. When new people enter them, the social and economic systems have to adapt. This adaptation takes time because both the new immigrants and the existing citizens have to get used to the changes that occur. The primary responsibility of our elected MPs and bureaucrats is to serve the citizens of New Zealand govern for the benefit of the citizens that elected them and pay their wages. Immigration policies and decisions should be based on how they will effect the lives…


The governments are afraid to tell the truth. They treat the citizens as if they were children who want and want and want and government's first and only obligation is to give, give and give to keep them content so that they would vote for them again. What's wrong about saying the truth: Tighten your belts, please, or we would crash?

Replying to

The socialists believe is that the rest of the people are like "their children" who must be dependent and obedient to the government "for their own good". A socialist government is like a supreme parental figure that "the masses" must be dependent on and obedient to because they are not capable of managing their own lives. The socialists ignore and deny the reality that these "children" are the employers whose efforts and incomes provide all the funding that the politicians and bureaucrats use to increase their authority and power. The inevitable consequence of socialism is that the "parents" will keep taking, borrowing and spending what their productive "children" earn until they RUN OUT OF OTHER PEOPLES' MONEY and the children become impoverished and…


there is very little about eliminating the structural deficit or getting back to operating balance/surplus.”

I see this as a fine balancing act (recall there are three political parties in this Government) between returning to surplus as soon as possible - and avoiding the kind of ‘sharp shocks’ and politically awful headlines that would lose in 2027. Not scaring the markets is vital, as is not gifting the country back to the Left.

Replying to

Agreed, however we have given so much away and allowed ourselves to be taken in by lies and deceit that getting back to a reasonable level is going to be difficult and painful. Whatever we do fiscally/politically will be by standing up for our rights as a sovereign country and you can bet trade sanctions will beat us back into submission. I hope they take a strong stance but doubt it.


Predicting the future is always likely to fail because "shit happens". What is reliably predictable is that spending more than is earned inevitably results in poverty.

"Money" is a very interesting and complicated concept.

There is REAL MONEY that is used as a medium of exchange for goods and services between willing buyers and sellers in free markets. This real money indicates the value of the human time, efforts and ingenuity required to produce and provide others people with desired goods and services. Real money should also be a "store of value" that preserves the purchasing power of the human time, effort and ingenuity that produced and provided the desired goods and services. There is also FIAT CURRENCY that is more like Monopoly…

Replying to

So bloody true

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