There’s nothing in the starting position to suggest urgent and drastic change is required to steer the books towards where the Government wants them to be but a weaker economic and fiscal outlook could have made for a few tough choices.
" ANZ Research wouldn’t be surprised if the Treasury’s economic outlook proves a little more optimistic than their own.”
An upbeat exterior
ANZ Research wouldn’t be surprised if the Treasury’s economic outlook proves a little more upbeat than the Government’s - that’s at least been the recent experience. However, the Government knows the starting point will be weaker and will suspect the near-term outlook will have been downgraded too.
Treasury’s Half-Year Economic and Fiscal Update included quarterly growth forecasts of 0.7 per cent for both Q3 and Q4 2018. Actual data printed was 0.3 per cent and 0.6 per cent respectively. And now, near-term indicators suggest the earlier forecast for quarterly growth of 0.8 per cent quarter-on-quarter over 2019 is on the optimistic side.
So far, indicators for first quarter gross domestic product (GDP) point to growth closer to 0.5 per cent quarter-on-quarter – ANZ Research would be surprised if Treasury haven’t at least downgraded this one. Thereafter, the indicators are less certain.
It’s likely Treasury is expecting growth to pick up from mid-2019 (ANZ Research is too, albeit gradually) but the question is how strong will be? And that’s a tricky one. Because the Treasury’s forecasts are finalised well before the Budget publication date (in order to accommodate the Budget decision-making process), it is possible the economic outlook doesn’t include the impact from the official cash rate cut delivered on May 8.
The impact may be in the tables but the additional stimulus may not be baked fully into the GDP and inflation outlooks.
What really matters for tax revenue is nominal GDP. And on that front things are also probably looking a little softer than at the Half-Year Update.
As outlined above, real GDP is due for a downgrade (at least in the near term) and, on the prices side, the recent loss of economic momentum and waning capacity indicators suggest inflation pressures are a little softer.
From a trade perspective, despite prices for New Zealand’s key exports holding up remarkably well in the face of slowing global growth (for dairy a lot of the explanation here lies with softening global supply), it would be hard to justify an upgrade to the terms of trade outlook.
Fiscal policy decisions (which are guided by Government’s Budget Responsibility Rules and, at a more detailed level, the Wellbeing Budget priorities) together with the Treasury’s economic outlook (which informs the revenue and expenses forecasts) will determine where the fiscal forecasts land.
From the slightly higher starting point, delayed and reprioritised spending, alongside a slightly softer tax revenue outlook, will likely see the forecast operating balance before gains and losses surplus downgraded a touch. However, lifting surpluses across the forecast horizon are still expected.
Given the likelihood of a small downgrade in tax revenues, ANZ Research doesn’t see much upside in terms of higher discretionary spending. However, a downgrade to the labour market outlook could see forecast spending on social assistance payments rise, but this has actually been tracking below forecast to date.