“The cupboard is bare,” Finance Minister Willis declared last August, in a comprehensive attack on the credibility of Grant Robertson’s version of the fiscal position.
Assuming she believed her rhetoric at the time, it’s hard to understand why the current state of the economy is worse than expected.
It certainly isn’t worse than expected based on long-term economic forecasts.
Interest rates have stifled demand in the economy to put out the inflationary fire.
It was all in the script. All the major banks’ economists had recessionary conditions as central to their forecasts for 2024.
I say ‘recessionary’ because of the quirk that requires two successive quarters of negative growth in real GDP to call a proper recession.
In February last year, ANZ economists were forecasting that we’d get an average rate of -0.1 per cent across 2024. They had shifted that to a positive 0.9 per cent in their outlook last month.
It’s margin of error stuff. Where the outlook is being revised, it’s largely about the timing.
Following a small 0.1 per cent contraction in annual GDP in the year to March 2024, growth was expected to average just 0.8 per cent (per annum) during 2024 and 2025, according to Infometrics in March last year.
It’s true the December quarter GDP figures were down on forecasts - but only because economists had talked themselves up from earlier, more gloomy positions - in part, spurred on by the false dawn of global market optimism.
You’ve only got to take a small step back to see that the real pain is just beginning. Unlike pandemic effects, it is easier to call because it is orthodox stuff - a response to monetary policy signals.
Economists cop a lot of flak when they get forecasts wrong, even though it goes with the territory. No one is actually pretending they can predict the future.
Forecasts are designed to provide a realistic framework for us all to make our economic decisions within.
We should assess a range of different forecasts. We should look at best-case, worst-case and central-case scenarios and then factor them into our financial context - or the country’s (if you are running it).
For all that, the forecasting across the past year has been solid.
Interest rates have landed about where they were expected to and the economy is in about as good a shape as expected. Which is to say, bad shape.
Following the short phoney recession that was called for at the start of last year (eventually revised out), I used a fair bit of my weekly word count labouring the point that a real downturn was still to come.
“Whoever wins in October will be sailing into a whole new variety of economic storm,” I wrote in July.
Clearly, the Crown accounts are looking worse. That’s what happens when the economy slows. The tax take falls.
As conservative political commentator Matthew Hooton points out in his weekly column: National “can’t claim to be surprised by the outlook since it said it didn’t believe Robertson’s pre-election numbers, saying things were much worse”.
And he notes that if we look through that brief period of optimism late last year - which saw Treasury revise the outlook up - the numbers haven’t landed far away from the pre-election fiscal update (on which policy funding should be based).
With all due respect to Treasury, it is the nature of their estimates to always date quickly.
During the economic boom driven by all that Covid stimulus - there was a predictable run of “better than expected” Crown accounts. Now we should not be surprised by the reverse as the economy slows.
But fast-forward to last week and we have Willis “continuing to walk away from National’s pre-election promise to get the Government’s books back in surplus by the 2026-27 fiscal year,” as the Business Herald Wellington editor Jenée Tibshraeny put it last week.
“Willis is worried the Government won’t collect as much tax as expected late last year because of the sluggishness of the economy.”
That’s where all those GDP forecasts might have been helpful.
Joining the dots between the consensus outlook and the likelihood that would mean accounts landing south of Treasury forecasts, shouldn’t have been rocket science.
To put it generously, it looks like National was using best-case economic scenarios to justify policy promises that were marginal at best.
The tax cuts in particular (already ill-timed in my view) look unaffordable when balanced against basic infrastructure needs.
It is unlikely National can ditch such a central plank in its election policy, but delaying them a year might be feasible. It would be forgivable given the economic circumstances and probably forgotten by the next election.
The trouble is that the Government has painted itself into a corner by defending them thus far.
So we get this dubious line that tough economic conditions are surprising. I guess it might work as a political tactic - the bulk of the public may buy it.
But it bothers me because it chips away at the economic credibility of a Government, that needs to get that stuff right for all our sakes.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
