The clock ran out

This week's 'mini Budget' was certainly down the minier end of mini, and understandably so. While I sympathise with a bias for action, and there was also a political commitment to be honoured, by the time the coalition was settled and portfolios allocated, there just wasn't enough time left on the clock to pull everything together and produce an up to date and internally consistent mini-thingie and its accompanying Half-Year Economic and Fiscal Update (HYEFU). As the HYEFU notes (p9) its forecasts were put to bed on November 6, but after that it lists a slew of events (notably the new government and its policies, and some important data releases including that weaker than expected September quarter GDP number) that haven't been able to be fully factored in. We'll have to wait for the Budget Economic and Fiscal Update (BEFU) next year for a complete and up to date view.

That said, there were a couple of interesting bits of analysis in the HYEFU. One important issue is whether the economy is still at or above capacity - if it is, there might still be lurking inflation risks emanating from domestically traded but supply constrained goods and services, if it isn't, then we might start looking ahead to eventual RBNZ easing. Here's the HYEFU take: it's reasonably encouraging from an inflation-pressure perspective. On its 'output gap' calculations, Treasury reckons we'll be going from 1% above capacity in June '23 to roughly at-capacity (-0.1% below potential output) in June '24 and to clearly below (-1.0%) potential output by June '25.

That all depends, though, on whether you can get a good handle on potential output - the maximum level of GDP growth we could manage on a sustainable basis - and I don't envy the Treasury analysts their task ("There is considerable uncertainty surrounding the degree of excess demand in the economy" - HYEFU p14). One big uncertainty is how much of the recent immigration-superpowered increase in labour supply feeds into what GDP it will produce. Another is likely productivity growth, which recently has been all over the place, as the graph below shows, and it would be a brave person who claimed to know where it was going next. You'd think there might be a chance that post-Covid business practices (working from home, greater flexibility, less command and control), might be about to deliver some kind of productivity payoff, but then again maybe not: after all, over the 13 years in the graph, we've only managed to eke out a 0.3% a year productivity gain, and only a small part of it came in the most recent few years.

Finally, for me one of the most important bits in any HYEFU or BEFU is the degree to which the fiscal policy stance is stimulatory or contractionary, and whether the stance matches with the state of the business cycle (a 'pro-cyclical' stance, making booms even boomier and downturns even gloomier, being the trap to avoid). Here's the latest stab at the 'fiscal impulse', the degree to which underlying fiscal policy is looser or tighter than the year before.

To me, and accepting that some of the spend was in response to North Island weather events, the fiscal policy stance for the 2023-24 year was inappropriately procyclical. In June '23 the unemployment rate was only 3.6%: the economy didn't need a fiscal boost. And it also put fiscal policy at odds with the tightening stance of monetary policy, which had started to apply the brakes from late 2021 and pressed harder and harder through 2022 and into this year. Monetary policy needs mates, as they say, but it ended up dancing alone.

Looking ahead, the economic outlook is not that flash: over June '23 to June '25, HYEFU expects GDP growth at a relatively slow 1.5% a year pace, and unemployment to rise from 3.6% to 5.2%. That'll be a tricky environment to be thinking about taking 2.4% of GDP out of aggregate demand (the estimate of the fiscal impulse for 2024-25). The new government will need to be careful not to turn a slowdown into something worse.