A bleak economic outlook with a surplus even more distant than expected.
Treasury says our exit from deficit will be delayed - as it today releases its operating balance forecasts, including the ACC.
The deficit is expected to deepen more to a high of $16.9 billion dollars and not narrow to $60 million until the 2029-2030 financial year.
Infometrics Principal Economist Brad Olsen joined the Afternoons team to discuss further.
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Speaker 1 (00:09):
You're listening to a podcast from News Talks be follow
this and our wide range of podcasts now on iHeartRadio.
Speaker 2 (00:16):
So forecasts the economy will grow slower than hope next
year in today's Treasuries release of its half year Economic
and Fiscal update. To go through it, we're joined once
again by Brad Olson in for Metric CEO and Chief
economyss Gee Brad Good, Afternoon team, So what were the
big takeaways?
Speaker 3 (00:33):
Well, as you've outlined, I mean, the economy has had
a bit more of a setback this year than where
Treasury had expected it to evolve at the budget. So
the economic recovery taking longer to get going and from
sort of a deeper, darker position, And all of that
means that the government is not taking in quite as
much tax revenue as it probably would have hoped to
have seen growth in that and of course expenses are higher.
(00:57):
All of that means that now the return to surplus
has been pushed out another year. On the government's new
preferred measure, the ober Gal X figure, it's now taking
until twenty thirty for the books to return to surplus,
probably twenty thirty one for the old Obergall measure. So
long story short, we're still having to borrow to spend
(01:18):
on day to day items for the next couple of years,
and that's sort of hasn't changed. It's also, of course,
leaving the debt position in a slightly more uncomfortable position.
It's it's sort of peaking and not coming down nearly
as quickly as everyone would like. It reaches a peak
of forty six point nine percent that's neck core crown
debt to GDP in twenty twenty seven to twenty eight,
(01:40):
so again higher than was expected and taking longer to
come back down.
Speaker 4 (01:44):
Is that is that a genuinely risky number forty seven
percent of GDP? Or is that sort of just a
politically awkward number.
Speaker 3 (01:53):
It's bits of both. I mean, at the moment, it's
it's palatable enough, particularly because look, to drive that down
considerably and quickly, you'd really have to cut quite a
lot of spending out to the point where New Zealanders
would feel that they would get less services and a
whole lot less in the economy all of a sudden.
But it does mean that, Look, if a big challenge
erupted tomorrow, if you had geopolitical issues that turned into war,
(02:16):
if you saw another natural disaster. It's that debt headroom
that we use to sort of get ourselves out of
the picket, the tricky spot that we often find ourselves
and of course the last couple of decades has showing
that that happens quite frequently. So look, it's tough at
the moment because it really does highlight that again over time,
it's taking a lot longer than everyone expected and hoped
(02:38):
for the books to recover. And that's with you know,
to be fair, the government still putting a lot more
restraint on itself than previous governments who were adding a
lot more into the system, a lot harder to take away,
very easy to add spending into the system.
Speaker 4 (02:52):
Though, So for households, you know, barring a horrible event
or war, war is a horrible event. But barring a
horrible event, does it the land cirplus actually change anything
in daily life for Kiwi households.
Speaker 3 (03:07):
Not necessarily. If you're sort of you know, you're sitting
out there and going, well, what does it mean to
me as a household? You know, what am I going
to experience in the next three years that might have
been different from what I previously thought? Probably nothing it's
more that in the future, and as we continue to
go on, we're going to have to make more and
more difficult decisions over what we spend on and what
gets left out. And I think that's sort of a
(03:29):
message that Treasury is trying to convey quite strongly at
the moment, is that yes, things are happening. At the moment,
spending is happening. But if you know, all of a sudden,
you saw those debt figures, you know that weren't coming down,
and a big disaster struck, we would have to then
borrow considerably to get us out of the hole. And
at that point, to be blunt, we're probably going to
have to see tax increases to pay for that high
(03:50):
level of debt because you can't. I don't know about you,
but i've you know, people trying to take out a
mortgage when they don't pay off the first mortgage and
then just ask for more and more and more when
they haven't shown that they can pay off the first
one don't get looked that favorably by the bank usually,
So like that would be the challenge. My biggest issue
still looking through the fiscals is how much money is
going to certain sectors that really do. I don't want
(04:12):
to say they're out of control, but man, they make
it hard to spend on other parts of the economy.
You look over the next sort of five years or so,
treasuries forecast today say that New Zealand will spend an
extra seven point seven billion dollars on paying for New
Zealand superannuation alone. That's more than the increase to the
entire health and education budgets combined. So like, in terms
(04:33):
of decisions that we have to make as a country,
government spending will continue to go up based on the
current settings unless we change them, and that means that, look,
at some point in the next in my mind five
to ten years, the government's going to have to say, look,
we're putting money towards the current settings. So no, there's
no more money for this industry, for that industry, there's
no more money for health or education because we're putting
(04:54):
it on other stuff. That's the sort of decision and
the trade offs that we're going to have to make
as a country.
Speaker 4 (05:00):
So whose faulters this? Is it labour's over spending in
COVID times and post COVID times or is it the
government and their settings at the moment.
Speaker 3 (05:09):
Look, there's all elements to it. I mean, in a sense,
the blame can go around a lot of places. Of course,
having those much higher interest rates and continuing to see
quite a level of support into the economy during COVID
was necessary at the time, but it also means that
we're spending an extremely large amount of money on repaying
that debt over the next couple of years. You know,
(05:31):
it's tens of billions of dollars that are going to
just sort of on the effective government mortgage all the time.
There's a lot of spending that has been decided in
previous years that you know that continues basically for every
year after that. So previous decisions by previous governments are
a little bit more locked in. And you've seen again
(05:52):
a challenging ability for a new government to come in
and say, well, we're not going to do that because
people get used to it. You know, people have got
used to having anything from food and schools to a
whole lot of other policies that just weren't there, you know,
five ten years ago. To put some of this in perspective,
just before pandemic hit, you were seeing that core crown expenses,
So government spending effectively was it about twenty eight percent
(06:14):
of GDP At the end of the forecast period. In
twenty thirty, core crown expenses will still be thirty point
five percent of GDP, so more than two percentage points
more of the economy is now coming through and being
driven by government activity. So it is a real tough
one because it suggests that again we're living outside our
means and that there are some very very difficult calls,
(06:37):
Like if you are central government, and there's of course
been a lot of calls recently for you know, either
spending a whole lot more on one side of politics
or a whole lot less by other sides of politics.
In the middle of you've got the government going, well,
I sort of can't make anyone happy because I can't
spend a lot more because we're indeficite, but also can't
trim it as much back because you'd create all sorts
of challenges for low income households.
Speaker 2 (06:58):
So on that note, spread do you think the government
needs to look at text reform or new revenue measures
to address that deficit?
Speaker 3 (07:05):
I mean looks in an ideal economist, you'd sort of
do bits of everything. You'd have a little bit more
tax reform to try and broaden the base a little
bit more. You would run the ruler a whole lot
harder over some of the spending that government does, and
say to some industries and some sectors, look, you've got
support for quite a lot of time, but sorry, that's
ending today. And I would look quite seriously again about
(07:28):
some of those big, big spending items. I mean, at
the moment, even if we magiced up a whole bunch
of productivity, which we've been struggling with. To be fair,
even that wouldn't sort of put us away from the
pretty challenging fiscal conditions of the likes of Super. And look,
I know it sounds like I'm sort of banging on
about this one item. It is, it's sort of you know,
at one point it's going to be thirty billion dollars
(07:49):
that New Zealand spends on Super out towards the end
of the decade. At that point it's more than the
entire education budget at once. So like that one item,
that one incredibly large amount of money, is such a
fundamental one that unless you make a change to that,
I really don't think that you sort of make any
headway into the fiscal conditions at all. Every thing is
rats and mice.
Speaker 4 (08:10):
Now, Brad, you said that the the you know, the
COVID spending was necessary, but surely the fact that the
economy was so overcooked and interest rates went through the
roof and we saw it having to house prices and stuff,
surely we can say now that you know, definitively too
much money was pumped into the economy.
Speaker 3 (08:31):
Yes, to be clear, a lot of it was necessary
for a period of time. And I think the two
challenges that we've found looking back at COVID level spending
is that one, we left that support in place way
too long, Like we needed it at the start when
the economy was in a bad place, when we had
no idea, when we were coming out of lockdown, But
when we came out, when the economy started to get
(08:51):
its activity back up and running, we still provided that
support even though clearly the economy, the economic motor was humming.
So there's that challenge. There's also the fact that a
lot of stuff got counted as COVID spending when in hindsight,
you go, well, that wasn't really through us a pandemic. Again,
the likes of you know, paying for you know, health
and a whole lot of other eras was important during
(09:13):
a pandemic. Paying for jobs creation when the unemployment rate
got to its lowest level ever just about in modern history.
Probably wasn't COVID level spending here. It was probably just
general support that we didn't need.
Speaker 4 (09:25):
Now here's a text has come through because on the
show we've been talking about positivity and this textas says,
listen to Matt the fascist who keeps misleading on here
about things getting better? Are you going to still drag
on about that things are clearly getting worse? What do
you say to that text to Rob? I mean the
text to Rob, what do you say to Rob Brad Look.
Speaker 3 (09:43):
I hear the point, like yeah, and you look at
some of the indicators, you look at consumer confidence and everything.
And I'm not saying that we're out of the woods yet,
but we are seeing better economic indicators in a number
of areas. Will be waiting quite with quite bita breath
at this point for Thursday morning at ten forty five
when we get the latest GDP figures, but we do
expect that to have pulled us out of the whole
(10:04):
a little bit compared to where we were, say, three
months ago. So I think the key point here is that, look,
I do genuinely think looking at the numbers that we're
seeing an improvement. But I don't want anyone to sort
of take that the wrong way and say everything's fine
and sold and everything in twenty twenty six is going
to be great. It's not, but it is going to
be on a better pathway. Most of the indicators are
starting to suggest that. But it's certainly not as sort
(10:27):
of as much of a big boost up as we'd
probably like to see. But we've got to be careful.
We're still trying to sort of wean the economy into
a better place after its head all the support, so
there is a bit more balance. I think that's needed
going forward.
Speaker 2 (10:39):
Yeah, got to keep watering those green shoots, Brad.
Speaker 3 (10:43):
That's the one. You need the patrograss to come through.
But you also don't want to trample on it too
quickly or play too many games on it.
Speaker 2 (10:48):
After that, beautifully said Brad. Always good to get you on, mate,
Thank you very much. And I know we said this
a couple of days ago, but Merry Christmas if we
don't chet again. Mate, which I'm sure we want ame
to you, that is Brad. I'll send the CEO of
Infometrics and chief economists.
Speaker 1 (11:04):
For more from News Talk, said B. Listen live on
air or online, and keep our shows with you wherever
you go with our podcasts on iHeartRadio
You're listening to a podcast from News Talks be follow
this and our wide range of podcasts now on iHeartRadio.
Speaker 2 (00:16):
So forecasts the economy will grow slower than hope next
year in today's Treasuries release of its half year Economic
and Fiscal update. To go through it, we're joined once
again by Brad Olson in for Metric CEO and Chief
economyss Gee Brad Good, Afternoon team, So what were the
big takeaways?
Speaker 3 (00:33):
Well, as you've outlined, I mean, the economy has had
a bit more of a setback this year than where
Treasury had expected it to evolve at the budget. So
the economic recovery taking longer to get going and from
sort of a deeper, darker position, And all of that
means that the government is not taking in quite as
much tax revenue as it probably would have hoped to
have seen growth in that and of course expenses are higher.
(00:57):
All of that means that now the return to surplus
has been pushed out another year. On the government's new
preferred measure, the ober Gal X figure, it's now taking
until twenty thirty for the books to return to surplus,
probably twenty thirty one for the old Obergall measure. So
long story short, we're still having to borrow to spend
(01:18):
on day to day items for the next couple of years,
and that's sort of hasn't changed. It's also, of course,
leaving the debt position in a slightly more uncomfortable position.
It's it's sort of peaking and not coming down nearly
as quickly as everyone would like. It reaches a peak
of forty six point nine percent that's neck core crown
debt to GDP in twenty twenty seven to twenty eight,
(01:40):
so again higher than was expected and taking longer to
come back down.
Speaker 4 (01:44):
Is that is that a genuinely risky number forty seven
percent of GDP? Or is that sort of just a
politically awkward number.
Speaker 3 (01:53):
It's bits of both. I mean, at the moment, it's
it's palatable enough, particularly because look, to drive that down
considerably and quickly, you'd really have to cut quite a
lot of spending out to the point where New Zealanders
would feel that they would get less services and a
whole lot less in the economy all of a sudden.
But it does mean that, Look, if a big challenge
erupted tomorrow, if you had geopolitical issues that turned into war,
(02:16):
if you saw another natural disaster. It's that debt headroom
that we use to sort of get ourselves out of
the picket, the tricky spot that we often find ourselves
and of course the last couple of decades has showing
that that happens quite frequently. So look, it's tough at
the moment because it really does highlight that again over time,
it's taking a lot longer than everyone expected and hoped
(02:38):
for the books to recover. And that's with you know,
to be fair, the government still putting a lot more
restraint on itself than previous governments who were adding a
lot more into the system, a lot harder to take away,
very easy to add spending into the system.
Speaker 4 (02:52):
Though, So for households, you know, barring a horrible event
or war, war is a horrible event. But barring a
horrible event, does it the land cirplus actually change anything
in daily life for Kiwi households.
Speaker 3 (03:07):
Not necessarily. If you're sort of you know, you're sitting
out there and going, well, what does it mean to
me as a household? You know, what am I going
to experience in the next three years that might have
been different from what I previously thought? Probably nothing it's
more that in the future, and as we continue to
go on, we're going to have to make more and
more difficult decisions over what we spend on and what
gets left out. And I think that's sort of a
(03:29):
message that Treasury is trying to convey quite strongly at
the moment, is that yes, things are happening. At the moment,
spending is happening. But if you know, all of a sudden,
you saw those debt figures, you know that weren't coming down,
and a big disaster struck, we would have to then
borrow considerably to get us out of the hole. And
at that point, to be blunt, we're probably going to
have to see tax increases to pay for that high
(03:50):
level of debt because you can't. I don't know about you,
but i've you know, people trying to take out a
mortgage when they don't pay off the first mortgage and
then just ask for more and more and more when
they haven't shown that they can pay off the first
one don't get looked that favorably by the bank usually,
So like that would be the challenge. My biggest issue
still looking through the fiscals is how much money is
going to certain sectors that really do. I don't want
(04:12):
to say they're out of control, but man, they make
it hard to spend on other parts of the economy.
You look over the next sort of five years or so,
treasuries forecast today say that New Zealand will spend an
extra seven point seven billion dollars on paying for New
Zealand superannuation alone. That's more than the increase to the
entire health and education budgets combined. So like, in terms
(04:33):
of decisions that we have to make as a country,
government spending will continue to go up based on the
current settings unless we change them, and that means that, look,
at some point in the next in my mind five
to ten years, the government's going to have to say, look,
we're putting money towards the current settings. So no, there's
no more money for this industry, for that industry, there's
no more money for health or education because we're putting
(04:54):
it on other stuff. That's the sort of decision and
the trade offs that we're going to have to make
as a country.
Speaker 4 (05:00):
So whose faulters this? Is it labour's over spending in
COVID times and post COVID times or is it the
government and their settings at the moment.
Speaker 3 (05:09):
Look, there's all elements to it. I mean, in a sense,
the blame can go around a lot of places. Of course,
having those much higher interest rates and continuing to see
quite a level of support into the economy during COVID
was necessary at the time, but it also means that
we're spending an extremely large amount of money on repaying
that debt over the next couple of years. You know,
(05:31):
it's tens of billions of dollars that are going to
just sort of on the effective government mortgage all the time.
There's a lot of spending that has been decided in
previous years that you know that continues basically for every
year after that. So previous decisions by previous governments are
a little bit more locked in. And you've seen again
(05:52):
a challenging ability for a new government to come in
and say, well, we're not going to do that because
people get used to it. You know, people have got
used to having anything from food and schools to a
whole lot of other policies that just weren't there, you know,
five ten years ago. To put some of this in perspective,
just before pandemic hit, you were seeing that core crown expenses,
So government spending effectively was it about twenty eight percent
(06:14):
of GDP At the end of the forecast period. In
twenty thirty, core crown expenses will still be thirty point
five percent of GDP, so more than two percentage points
more of the economy is now coming through and being
driven by government activity. So it is a real tough
one because it suggests that again we're living outside our
means and that there are some very very difficult calls,
(06:37):
Like if you are central government, and there's of course
been a lot of calls recently for you know, either
spending a whole lot more on one side of politics
or a whole lot less by other sides of politics.
In the middle of you've got the government going, well,
I sort of can't make anyone happy because I can't
spend a lot more because we're indeficite, but also can't
trim it as much back because you'd create all sorts
of challenges for low income households.
Speaker 2 (06:58):
So on that note, spread do you think the government
needs to look at text reform or new revenue measures
to address that deficit?
Speaker 3 (07:05):
I mean looks in an ideal economist, you'd sort of
do bits of everything. You'd have a little bit more
tax reform to try and broaden the base a little
bit more. You would run the ruler a whole lot
harder over some of the spending that government does, and
say to some industries and some sectors, look, you've got
support for quite a lot of time, but sorry, that's
ending today. And I would look quite seriously again about
(07:28):
some of those big, big spending items. I mean, at
the moment, even if we magiced up a whole bunch
of productivity, which we've been struggling with. To be fair,
even that wouldn't sort of put us away from the
pretty challenging fiscal conditions of the likes of Super. And look,
I know it sounds like I'm sort of banging on
about this one item. It is, it's sort of you know,
at one point it's going to be thirty billion dollars
(07:49):
that New Zealand spends on Super out towards the end
of the decade. At that point it's more than the
entire education budget at once. So like that one item,
that one incredibly large amount of money, is such a
fundamental one that unless you make a change to that,
I really don't think that you sort of make any
headway into the fiscal conditions at all. Every thing is
rats and mice.
Speaker 4 (08:10):
Now, Brad, you said that the the you know, the
COVID spending was necessary, but surely the fact that the
economy was so overcooked and interest rates went through the
roof and we saw it having to house prices and stuff,
surely we can say now that you know, definitively too
much money was pumped into the economy.
Speaker 3 (08:31):
Yes, to be clear, a lot of it was necessary
for a period of time. And I think the two
challenges that we've found looking back at COVID level spending
is that one, we left that support in place way
too long, Like we needed it at the start when
the economy was in a bad place, when we had
no idea, when we were coming out of lockdown, But
when we came out, when the economy started to get
(08:51):
its activity back up and running, we still provided that
support even though clearly the economy, the economic motor was humming.
So there's that challenge. There's also the fact that a
lot of stuff got counted as COVID spending when in hindsight,
you go, well, that wasn't really through us a pandemic. Again,
the likes of you know, paying for you know, health
and a whole lot of other eras was important during
(09:13):
a pandemic. Paying for jobs creation when the unemployment rate
got to its lowest level ever just about in modern history.
Probably wasn't COVID level spending here. It was probably just
general support that we didn't need.
Speaker 4 (09:25):
Now here's a text has come through because on the
show we've been talking about positivity and this textas says,
listen to Matt the fascist who keeps misleading on here
about things getting better? Are you going to still drag
on about that things are clearly getting worse? What do
you say to that text to Rob? I mean the
text to Rob, what do you say to Rob Brad Look.
Speaker 3 (09:43):
I hear the point, like yeah, and you look at
some of the indicators, you look at consumer confidence and everything.
And I'm not saying that we're out of the woods yet,
but we are seeing better economic indicators in a number
of areas. Will be waiting quite with quite bita breath
at this point for Thursday morning at ten forty five
when we get the latest GDP figures, but we do
expect that to have pulled us out of the whole
(10:04):
a little bit compared to where we were, say, three
months ago. So I think the key point here is that, look,
I do genuinely think looking at the numbers that we're
seeing an improvement. But I don't want anyone to sort
of take that the wrong way and say everything's fine
and sold and everything in twenty twenty six is going
to be great. It's not, but it is going to
be on a better pathway. Most of the indicators are
starting to suggest that. But it's certainly not as sort
(10:27):
of as much of a big boost up as we'd
probably like to see. But we've got to be careful.
We're still trying to sort of wean the economy into
a better place after its head all the support, so
there is a bit more balance. I think that's needed
going forward.
Speaker 2 (10:39):
Yeah, got to keep watering those green shoots, Brad.
Speaker 3 (10:43):
That's the one. You need the patrograss to come through.
But you also don't want to trample on it too
quickly or play too many games on it.
Speaker 2 (10:48):
After that, beautifully said Brad. Always good to get you on, mate,
Thank you very much. And I know we said this
a couple of days ago, but Merry Christmas if we
don't chet again. Mate, which I'm sure we want ame
to you, that is Brad. I'll send the CEO of
Infometrics and chief economists.
Speaker 1 (11:04):
For more from News Talk, said B. Listen live on
air or online, and keep our shows with you wherever
you go with our podcasts on iHeartRadio
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