The Government's half-year fiscal update paints a bleak economic picture for the years ahead.
It revealed the Government's debt path is steeper than previously anticipated - and surplus won't be reached until the end of the decade.
Infometrics Principal Economist Brad Olsen explains how things got to this point - and how the Government can redirect the economy.
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Speaker 1 (00:00):
Finance Minister Nicola Willis certainly isn't sugar coating our financial situation.
She says, it is dire. Debt is up, the tax
takers down. Brad Olsen is the infametric's principal economies with
us tonight, Brad, good evening, Good evening. Let's start with
the couple of numbers jump out at me. Firstly, forty
seven percent of GDP. That's government debt to GDP forty
(00:23):
seven percent. It will peak at Is that have we been?
I mean, I'm sure we have been higher, but certainly
not in the last week, while before COVID we were
at about twenty Yeah.
Speaker 2 (00:33):
Look, I mean that debt figure is ugly, and I
think it highlights that over time we've built up that
level of debt time and time again to get through
some pretty challenging economic times. Recently, of course, the pandemic
was still a pretty big hit in the government did
need to respond to it. The challenge, of course, is
that having racked up so much debt to do that,
at some point the bill comes for repayment, and we're
(00:54):
still continuing to see the government spend more than its
earning for the next couple of years. Which means that
we're not actually even starting to pay it down. We're
just sort of adding more and more on. So the
fiscals have gotten a bit out of kilter given the
fact that that debt's higher. But that's also coming about
because government revenue is expected to be thirteen billion dollars
(01:15):
less over the four cast period than expected at budget,
but the government will be spending nearly six billion dollars
more than they thought at budget time. That wider gap
with more spending less money coming in, that's a very
difficult place to get yourself out of, and.
Speaker 1 (01:28):
That's why we're going to borrow Barbiere. Is there a
number where because we're a small trading nation, I know
there are lots of countries around the world with far
worse ratios than that, But is there a number at
which you start to go alarm bells ring?
Speaker 2 (01:41):
I mean, certainly Treasury has highlighted before that somewhere between.
Once you get up to it sort of over fifty,
you really start to get quite worried, just because if
there is another shock of any sort, you know, be
it a something that hits our primary and export markets,
if you have another natural disaster and other pandemic. New
Zealand needs the ability to respond and we know that
in those tough times we often can't rely on our
(02:04):
own self sufficiency quite as much. Now you look at
other bigger economies, they just have a little bit more
sort of natural heft. They can trade amongst themselves locally
a lot more. We can't quite as much in New Zealand.
We're a lot more dictated by how global economic growth
goes and how our exports and production go. So if
those get hit, we do need a little bit more
(02:24):
buffer room to get ourselves out of the pickle that
we might find ourselves in. That's where that deck capacity
becomes so important. And again we know that we've got
a lot of infrastructure we need to invest in and
that's important. But with the fact that government is still
going to be spending more than it's earning over quite
a long period of time, we're still borrowing for just
the day to day costs and that is quite challenging
(02:45):
and it means we're still half a decade away from
seeing the books back in surplus. That's a long time
to wait.
Speaker 1 (02:51):
It certainly is Tell me what is your read on
the OBI gal X. Is it justified that we are
making the acc deficit basically off the books.
Speaker 2 (03:04):
I mean, I think it's very convenient timing, of course,
to come out with the change at the moment. To
be fair, even with the change, the effective surplus has
been pushed out nearly two years, so again it's sort
of quite a big shift there. Realistically, I think there
is some merit into what the government has done with
that figure, but I don't think it helps that there's
all these different numbers that we now cast about on
(03:25):
so may be useful, but to be fair, I think
we're all trying to get our heads around it. Having
had it dropped on us, you know, a couple of
hours ago. It still will take us some time to
read through it. But definitely a change that I think
we're all going to have to get our heads around.
Speaker 1 (03:38):
Were you surprised to see the Finance Minister basically stick
to her guns that the books have changed quite drastically,
deteriorated quite drastically between the budget and now her fiscal
position is basically the same.
Speaker 2 (03:52):
I was a little bit surprised that the government isn't
looking to in fact almost go steeper and deeper when
it comes to making some tough choices around spending. The
Finance Minister, of course confirmed those two point four billion
dollar operating allowances, but I think that also highlights the
current economic reality for the government, which is that we've
(04:12):
made such big commitments on government spending the last couple
of years. It's very easy to do those and to
commit them at the time, very hard to unwind them back.
And so you know, some people are saying, well, geez,
we feel like we're in austerity politics. I mean, really,
at two point four billion each and every year, we're
clearly not. But even then, even with what are some
of the smallest budget allowances in a reasonable amount of time,
(04:35):
the government is still going to be spending more than
thirty percent of GDP on operating expenses all the way
out to twenty twenty nine. I mean, it highlights that
we're not getting our sort of spending relative to our
income under control particularly quickly. But I think as well
the minister's probably stuck between a bit of a rock
and a hard place here. Ryan, if you had you'd
have some people if the Minister cuts the allowances, say well,
(04:58):
government's not spending enough on New Zealand, and other people
probably saying the government spending too much. I mean, you
really can't win when you're the Minister of Finance.
Speaker 1 (05:05):
No, and she has an election to worry about in
twenty twenty six, and the last thing she would want
to do would be to look like Ruth Richardson and
then you know, throw throw a one term government out
the window. Let's look at the GDP twenty twenty five
one point six percent, twenty twenty six three point four percent,
twenty twenty seven two point seven percent. Now, if you
(05:25):
look at per capita, we're actually still going backwards in
twenty twenty five. But why is it that we go
up and then down again, Brad In twenty twenty six
we're at three point four and then in twenty twenty
seven we go down to two point seven.
Speaker 2 (05:39):
I think there's sort of two elements coming through there.
One is a bit of a mathematical bounce back that
as those interest rates come down and you start to
see the economy unlocked, there's a little bit of pent
up demand that likely comes through after some weaker grosser
because you didn't have where you had negative levels of
activity this year. You get slightly better next year, but
it's still not amazing. Then the year after, once you
(06:00):
really sort of get the economic motor running again, mathematically,
that looks a touch faster than before. After that, though,
that sort of trend slow down comes through because we
just don't expect to be getting that same level of
productivity coming forward. And I think that the worry as
well is that when we look at the different components
of the economy, the government clearly isn't going to be
stimulating a huge amount of activity. We're worried about the
(06:23):
likes of global factors, and so we're not quite so
sure that exports are really going to drive things into
the future. We know that productivity hit means that sort
of general business profitability isn't going to be amazing, and
so it won't be contributing huge amounts, which sort of
leads households as the main potential driver of the economy
going forward. That's sort of a difficult proposition when interest
(06:45):
rates are not going to drop low, they're just going
to go back to sort of normal. So I think
that the sort of growth center for the economy is
a little bit harder to pick at the moment. And
again that makes Treasury's job quite hard because there's a
lot of stuff that everyone wants to spend on, but
without stronger economic growth, you don't get as much text
take and you don't have the money that you want
to spend.
Speaker 1 (07:04):
Great points, Brad brad Olsen in for Metrics Principal Economists.
For more from Heather Duplessy Alan Drive, listen live to
News Talks it B from four pm weekdays, or follow
the podcast on iHeartRadio
Finance Minister Nicola Willis certainly isn't sugar coating our financial situation.
She says, it is dire. Debt is up, the tax
takers down. Brad Olsen is the infametric's principal economies with
us tonight, Brad, good evening, Good evening. Let's start with
the couple of numbers jump out at me. Firstly, forty
seven percent of GDP. That's government debt to GDP forty
(00:23):
seven percent. It will peak at Is that have we been?
I mean, I'm sure we have been higher, but certainly
not in the last week, while before COVID we were
at about twenty Yeah.
Speaker 2 (00:33):
Look, I mean that debt figure is ugly, and I
think it highlights that over time we've built up that
level of debt time and time again to get through
some pretty challenging economic times. Recently, of course, the pandemic
was still a pretty big hit in the government did
need to respond to it. The challenge, of course, is
that having racked up so much debt to do that,
at some point the bill comes for repayment, and we're
(00:54):
still continuing to see the government spend more than its
earning for the next couple of years. Which means that
we're not actually even starting to pay it down. We're
just sort of adding more and more on. So the
fiscals have gotten a bit out of kilter given the
fact that that debt's higher. But that's also coming about
because government revenue is expected to be thirteen billion dollars
(01:15):
less over the four cast period than expected at budget,
but the government will be spending nearly six billion dollars
more than they thought at budget time. That wider gap
with more spending less money coming in, that's a very
difficult place to get yourself out of, and.
Speaker 1 (01:28):
That's why we're going to borrow Barbiere. Is there a
number where because we're a small trading nation, I know
there are lots of countries around the world with far
worse ratios than that, But is there a number at
which you start to go alarm bells ring?
Speaker 2 (01:41):
I mean, certainly Treasury has highlighted before that somewhere between.
Once you get up to it sort of over fifty,
you really start to get quite worried, just because if
there is another shock of any sort, you know, be
it a something that hits our primary and export markets,
if you have another natural disaster and other pandemic. New
Zealand needs the ability to respond and we know that
in those tough times we often can't rely on our
(02:04):
own self sufficiency quite as much. Now you look at
other bigger economies, they just have a little bit more
sort of natural heft. They can trade amongst themselves locally
a lot more. We can't quite as much in New Zealand.
We're a lot more dictated by how global economic growth
goes and how our exports and production go. So if
those get hit, we do need a little bit more
(02:24):
buffer room to get ourselves out of the pickle that
we might find ourselves in. That's where that deck capacity
becomes so important. And again we know that we've got
a lot of infrastructure we need to invest in and
that's important. But with the fact that government is still
going to be spending more than it's earning over quite
a long period of time, we're still borrowing for just
the day to day costs and that is quite challenging
(02:45):
and it means we're still half a decade away from
seeing the books back in surplus. That's a long time
to wait.
Speaker 1 (02:51):
It certainly is Tell me what is your read on
the OBI gal X. Is it justified that we are
making the acc deficit basically off the books.
Speaker 2 (03:04):
I mean, I think it's very convenient timing, of course,
to come out with the change at the moment. To
be fair, even with the change, the effective surplus has
been pushed out nearly two years, so again it's sort
of quite a big shift there. Realistically, I think there
is some merit into what the government has done with
that figure, but I don't think it helps that there's
all these different numbers that we now cast about on
(03:25):
so may be useful, but to be fair, I think
we're all trying to get our heads around it. Having
had it dropped on us, you know, a couple of
hours ago. It still will take us some time to
read through it. But definitely a change that I think
we're all going to have to get our heads around.
Speaker 1 (03:38):
Were you surprised to see the Finance Minister basically stick
to her guns that the books have changed quite drastically,
deteriorated quite drastically between the budget and now her fiscal
position is basically the same.
Speaker 2 (03:52):
I was a little bit surprised that the government isn't
looking to in fact almost go steeper and deeper when
it comes to making some tough choices around spending. The
Finance Minister, of course confirmed those two point four billion
dollar operating allowances, but I think that also highlights the
current economic reality for the government, which is that we've
(04:12):
made such big commitments on government spending the last couple
of years. It's very easy to do those and to
commit them at the time, very hard to unwind them back.
And so you know, some people are saying, well, geez,
we feel like we're in austerity politics. I mean, really,
at two point four billion each and every year, we're
clearly not. But even then, even with what are some
of the smallest budget allowances in a reasonable amount of time,
(04:35):
the government is still going to be spending more than
thirty percent of GDP on operating expenses all the way
out to twenty twenty nine. I mean, it highlights that
we're not getting our sort of spending relative to our
income under control particularly quickly. But I think as well
the minister's probably stuck between a bit of a rock
and a hard place here. Ryan, if you had you'd
have some people if the Minister cuts the allowances, say well,
(04:58):
government's not spending enough on New Zealand, and other people
probably saying the government spending too much. I mean, you
really can't win when you're the Minister of Finance.
Speaker 1 (05:05):
No, and she has an election to worry about in
twenty twenty six, and the last thing she would want
to do would be to look like Ruth Richardson and
then you know, throw throw a one term government out
the window. Let's look at the GDP twenty twenty five
one point six percent, twenty twenty six three point four percent,
twenty twenty seven two point seven percent. Now, if you
(05:25):
look at per capita, we're actually still going backwards in
twenty twenty five. But why is it that we go
up and then down again, Brad In twenty twenty six
we're at three point four and then in twenty twenty
seven we go down to two point seven.
Speaker 2 (05:39):
I think there's sort of two elements coming through there.
One is a bit of a mathematical bounce back that
as those interest rates come down and you start to
see the economy unlocked, there's a little bit of pent
up demand that likely comes through after some weaker grosser
because you didn't have where you had negative levels of
activity this year. You get slightly better next year, but
it's still not amazing. Then the year after, once you
(06:00):
really sort of get the economic motor running again, mathematically,
that looks a touch faster than before. After that, though,
that sort of trend slow down comes through because we
just don't expect to be getting that same level of
productivity coming forward. And I think that the worry as
well is that when we look at the different components
of the economy, the government clearly isn't going to be
stimulating a huge amount of activity. We're worried about the
(06:23):
likes of global factors, and so we're not quite so
sure that exports are really going to drive things into
the future. We know that productivity hit means that sort
of general business profitability isn't going to be amazing, and
so it won't be contributing huge amounts, which sort of
leads households as the main potential driver of the economy
going forward. That's sort of a difficult proposition when interest
(06:45):
rates are not going to drop low, they're just going
to go back to sort of normal. So I think
that the sort of growth center for the economy is
a little bit harder to pick at the moment. And
again that makes Treasury's job quite hard because there's a
lot of stuff that everyone wants to spend on, but
without stronger economic growth, you don't get as much text
take and you don't have the money that you want
to spend.
Speaker 1 (07:04):
Great points, Brad brad Olsen in for Metrics Principal Economists.
For more from Heather Duplessy Alan Drive, listen live to
News Talks it B from four pm weekdays, or follow
the podcast on iHeartRadio
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