Never mind the deficit

I've just spent the morning, with the rest of the usual journo and economist suspects, in Treasury's lock-up for the Half Yearly Economic and Fiscal Update. Though sometimes I wonder why I bother: Bill English's press handout essentially said that the numbers on the fiscal outcome aren't worth the paper they're written on ("Previous forecasting rounds show the outlook can change significantly between the Half Year Update and the final accounts being published").

No doubt most of the media coverage will be along "Government misses its fiscal surplus target" lines: the government had planned a fiscal surplus of  $297 million for the year to next March, and it now looks like a fiscal deficit of $572 million. And even the forecast surplus for the year to March '16 ($565 million) is partly the result of a bit of jiggery-pokery with the contingency allowance the government has for possible future spending.

But I don't give much of a hoot about that, and neither should you, for several reasons. For one, the fiscal surplus or deficit is the difference between two very large numbers (government revenue and spending), each around the $72 billion mark, and very small changes in the very big numbers can make fiscal surpluses and deficits appear and disappear, just like that (as Tommy Cooper used to say). For another, there's an entirely plausible, and benign, reason for the forecast surplus becoming a forecast deficit: inflation has turned out to be lower than expected, which means the tax take in dollar terms is lower than expected. It's not, for example, the result of letting government spending rip (spending is actually gently drifting down as a share of the economy). And for yet another, while a deficit of $572 million sounds like something substantial, it's actually only 0.2% of GDP. However you look at the "missed the target" angle, it's no biggie from an economic perspective.

There were more substantial things to focus on. I was especially interested in what Treasury's forecasts for GDP growth would look like, given that last week the Reserve Bank had upped its expectations for the economy. It's encouraging.

It's possible, too, that there's more than the usual business cycle going on here: both the Reserve Bank, and now the Treasury, have begun to wonder whether the long-term growth rate of the economy ("potential output") hasn't picked up a bit (it's one of the alternative scenarios that Treasury looked at in the Update). Some of it is down to big increases in business investment, some of it down to high levels of net immigration (we're expected to gain 52,400 people in the year to March, and keep gaining people in future years, though not at the current clip). As Treasury noted, many of these people are of working age, and "the skills, ideas and international connections of the migrants are assumed to further increase productivity growth". Xenophobes, please note.

Two other things caught my eye.

With the caveat that whatever the reliability of fiscal forecasts, exchange rate forecasts must be an order of magnitude more flakey again, Treasury is currently picking that the overall value of the Kiwi dollar isn't going anywhere over the next three years. Most of us have been operating on the assumption that the Kiwi dollar is "too high" and will drop in the none too distant future: maybe it isn't going to happen.

And the other thing is the outlook for what we earn on our exports compared to what we pay for our imports (the "terms of trade"). The working assumption is that yes, we're suffering on the dairy front at the moment, but other commodities will keep us going, dairy will recover in the end, plus we're paying a lot less for the oil we import. Maybe that's how it will indeed play out, fingers crossed, but it's a reminder that we're still vulnerable - arguably too vulnerable - to the vagaries of the commodity markets.