The Government’s Books Are Hard To Balance. Lower Productivity, Lower Tax, Higher Spend

• The Kiwi economy is in recession and the outlook is simply weaker, compared to the May budget. Nominal GDP (the tax base) is coming in $20bn (or 1.1%) lower than Budget. That makes the Government’s fiscal position that much harder to manage. Why? Revenue is down because people spend less (GST take) and earn less (PAYE). And higher unemployment rates required benefits.
• The Government will record 9 straight years of deficits, worse than post-GFC. But to be fair, Governments did a lot more during Covid.
• We did get a new measure called OBEGALx (sounds like an AI robot with terminator tendencies), that strips out ACC and gets back to surplus in 2028/29.
• But the real story is the reduction in productivity. And the Government is partly to blame here – both sides of Government that is. Why? Because we’ve underinvested in key infrastructure for decades. And that’s strangling our economy. We do applaud the commentary around building a pipeline of infrastructure investment. Time to walk the walk.
• Wider and more persistent deficits mean more debt. And Treasury issuance is higher over the forecast horizon. We’re not worried, as sovereign debt levels are coming off a very low base, and compare favourably to our offshore peers.

It is hard for the Government, any Government, to balance the books of an economy in recession. And the forecasts have been hamstrung by poor productivity. We’re not getting bang for buck. And we’re not getting back to surplus, anytime soon.

The Budget is being imbalanced by a significant reduction in the forecast tax base (the nominal economy) and an unwelcome lift in benefits (with rising unemployment).

Treasury now forecasts the Kiwi economy to be about $20bn (or 1.1%) smaller than the May budget. A smaller economy generates less tax revenue. GST receipts are below forecast, because people are spending less. Income tax is below forecast, because wage growth is cooling. Corporate tax is below forecast, because company revenues are weaker. And that’s the tax take. Spending is higher than forecast, because benefits are higher with more unemployed. And there’s also more to be spent in other areas, like education, just to meet changing demographics. The ageing population, a sensitive subject, will only make this worse every year into the future.

The return to surplus has been achieved on a technicality. And that is through the introduction of a new fiscal measure coined OBEGAL X. It’s essentially the original measure of OBEGAL but removes ACC revenues and expenditure on the basis that recent ACC deficits have clouded the true OBEGAL. Nonetheless, the return to an OBEGAL X surplus is still further away than it was back at the May Budget. While regular OBEGAL see’s no return to surplus in the forecast horizon. And overall, the weaker reality means more debt. The debt management office will have to issue an additional $20bn beyond 2025 and out to 2028. Net debt rises to 46.5% of GDP and remains above previous projections

For us, the real story is the reduction in productivity. Lower estimates of Kiwi productivity are the leading factor in Treasury’s softer outlook today. Failure to invest in key Infrastructure for decades has strangled us. Yes, the government have re-emphasised their commitment to prioritise a pipeline of infrastructure investment. Which we applaud. But now we need them to walk the walk.

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