Editorial: Back to reality with election in four weeks

Treasury secretary Gabriel Makhlouf Photo / supplied

After six weeks of fun and festivities the country has to force its collective mind to focus on an election just four weeks from Saturday. The Treasury's pre-election economic and fiscal update yesterday has usefully set the scene.

It may be remembered that the Treasury's last comprehensive report, for the May Budget, featured a growth forecast for next year of 4 per cent, helped considerably by the expected rebuilding of Christchurch.

The figure looked unduly optimistic at the time and though it has been lowered it still looks high. The forecasters expect growth to peak at 3.6 per cent by March 2013, as the rebuilding starts later, takes longer and costs more.

Estimates of the damage have risen from $15 billion to $20 billion. Since this money will mostly come from insurance, it represents a substantial cash injection which, the Treasury notes, does not depend on the state of the world economy. We can be thankful for that, because the world economic outlook has darkened considerably since the Budget.

Growth in Europe and the United States has slowed as governments in the eurozone fail to find solutions to their sovereign debt crisis and the US President and Congress argue over stimulants that so far have failed to create more jobs.

New Zealand's last election was held at the height of the global financial crisis and this one takes place amid resulting uncertainties. A euro debt collapse could trigger another banking crisis at any time.

The Treasury's latest forecasts for growth and government finances assume European governments can find a way to manage the region's debt issues, and that the US adopts an additional fiscal stimulus next year. Both assumptions are in the realm of groundless optimism but they help the Treasury maintain its forecast for a Budget surplus to return in 2014/15.

The Government will make that prospect a major part of its case for re-election, pointing out that balancing the books by that date assumes a $5 billion to $7 billion windfall from share floats in four energy companies and Air New Zealand.

Labour will say the balance can equally be restored by taxing capital gains and high incomes more heavily.

But the more important election debate will be about steps the Government is taking, or not taking, to change household investment habits. The pre-election update supports the Government's contention that the fall in house prices since 2007 has caused a lasting change in behaviour.

Oddly, this differs from the Treasury's view represented to Parliament by the Finance Minister just before the House rose.

The update notes that household saving exceeds spending for the first time in a decade and household debt is declining as a ratio of income. But will this trend continue when the rebuilding of Christchurch starts and the national economy regains strength? That is the question that ought to haunt the election.

At present, the Treasury says, "export prices are high, business confidence remains firm and the Rugby World Cup has provided some temporary support for consumption and for services exports". Its optimism seems a little high on all counts. Fonterra yesterday reduced its projected pay-out, business remains bearish with so many uncertainties abroad and it remains to be seen whether the World Cup has produced the 0.3 per cent GDP stimulus predicted in May.

In Treasury-speak its risk of error is "skewed to the downside", an admission of optimism.

Voters may be in the same mood in the wake of the World Cup but they will assess their welfare on the signs of activity around them and the security of their jobs. The clouds over the world economy might not seem so far away by election day.