Thursday, 16 May 2013

Today's Budget - fiscal balance (3)

Earlier posts fossicked through some of the better measures of what’s really happening to the fiscal position than the headline numbers that get the big coverage, and by and large they showed that fiscal policy is on the right track – the projected surpluses are ‘real’, and the fiscal books look like they can come good without doing too much short-term harm to the economy.

Before we all get too euphoric, though, the current figures are flattered somewhat by the fact that New Zealand incomes are currently getting a – possibly unsustainable – boost from high prices for our export commodities. The tax take is getting its share of those high dairy payouts (for example), and if global dairy prices fall, so will the government’s revenues. Maybe the government’s finances ought to be looked at, as if they weren't getting this windfall?

And that’s done by Treasury too, again in the documents down the back of the Budget materials. I mentioned earlier that the cyclically adjusted fiscal deficit in this June 2013 fiscal year will be 1.8% of GDP.  If you said that commodity prices ought to be around their longer-term average (say over the past 20 or 30 or 50 years) rather than where they are today (namely, in the stratosphere), then the ‘more normal state of affairs’ fiscal deficit blows out from 1.8% of GDP to more like 3% of GDP.
That’s a bit of a worry: we wouldn't want to see some shock to the global economy happening any time soon that sent commodity prices sharply lower, as that would expose a bit of a vulnerability in our fiscal position.

Of course, it’s possible that commodity prices have moved permanently higher for a good reason (thumping great increases in demand in Asia, for one thing). If that’s the case, there’s obviously much less cause to worry. Another measure that Treasury calculates is a statistical one that simply smooths out commodity prices – in current circumstances, the method assumes that commodity prices would have risen but not as abruptly as they actually have, and it doesn't assume that they will drop back to some lower level again. On that basis, as you’d expect, there’s much less to worry about : the deficit is only a little larger (on average) in coming years than otherwise.

The truth is probably somewhere in between the two measurement methods – there’s probably some modest flattery of the government accounts from current world commodity markets, but not enough to make you question the plausibility of being able to get back to a sustainable fiscal position.

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