Tuesday, 16 December 2014

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.


  1. Interesting to see Treasury forecasting the gdp growth and unemployment rate both track down. Would this be because economy expected to be at capacity in 2015?

    Andrew R, but had to sign in as anonymous to enter a comment.

  2. Thanks for the comment, and sorry you've had to sign in as Anonymous - the setting on this blog is that anyone at all can comment (that's how it's supposed to work, anyway), so I'm not sure why it's been an issue for you. Thanks for delurking, in any event!
    In fact Treasury's forecast is that the economy will be running slightly above capacity over the 2015-18 period, and will be back at capacity in the March '19 year.
    The slowdown in the GDP growth rate looks mostly down to a slowdown in housebuilding (as ChCh gets finished) and in business investment, after some big increases in 2014-16.
    The slowdown and then stabilisation of the unemployment rate is driven by the GDP rate and the forecast growth of the labour force. It looks (from the 2019 numbers) as if we need GDP growth around 2.2% to keep the U rate stable, which is interesting - it seems to be rather higher in Oz, where 3% looks more like the U-steady GDP growth rate.
    All data BTW can be found in Table 1.1 on p8 of the HYEFU.

  3. What does an economy running "above capacity" mean in practice? We can't employ more people than are here, or use machinery more than 24 hours/day, so what is the supra-capacity?

  4. I've got some sympathy for your comment,especially when you're thinking about long periods (it's easier to imagine over shorter periods where you can picture people putting in long shifts, say, that they wouldn't be able to keep up over the longer haul). The longer it goes on, the more you'd think that max productive capacity wasn't measured right in the 1st place. In practice I'd guess it would mean longer or extra or harder shifts than would normally be comfortable, or machines running longer or harder than they'd normally be worked, or assets being pressed into service that might normally be used for sthg else. The % above capacity isn't huge, by the way, so it's conceivable that a small, unusually intensive period of pushing your luck can get you there

    1. That wasn't really a comment, it was a genuine question, to which I received a genuine and helpful answer, so thank you for that. Have a good Christmas and may the gifts you give and receive bring greater utility to the receiver than cost to the giver

  5. Thanks! FWIW I try to keep comment interchanges constructive (even though I suspect the odd one has been a leg-pull by economist colleagues...). May your endowment effect be large on Christmas Day


Hi - sorry about the Captcha step for real people like yourself commenting, it's to baffle the bots