KEY POINTS:
Officials are likely to warn the incoming Government to expect fiscal deficits up to $1 billion a year deeper than those forecast just a month ago.
But that should not be taken to require a policy of penny-pinching, economists say.
"It's not the time to be picking up pennies in front of the road-roller," said Westpac chief economist Brendan O'Donovan. "It's a time for Government to be stimulatory."
The pre-election fiscal and economic update (Prefu) was released on October 6 and its economic forecasts were finalised at the end of August, so they do not capture the extreme market turmoil which has occurred since then.
The Prefu does, however, sketch an alternative scenario involving a deeper recession, whose assumptions look much more realistic now and whose conclusions therefore give a clue to what advice the incoming Government will be receiving from the Treasury and Reserve Bank this week.
On these assumptions economic growth would be weaker, reducing tax revenues while costs like the unemployment benefit would be higher.
The result is a series of bigger fiscal deficits than the Prefu's forecast.
For the 2009/10 year, the increase in the deficit would be 0.5 per cent of GDP, adding $1 billion to the $1.7 billion already forecast.
The effect on government debt would be to raise it $4 billion to $58 billion by 2013. At current bond yields, that would add about $250 million a year to the Crown's interest bill.
The deeper recession scenario is based on a more severe and longer international slowdown than seemed likely even two months ago.
It assumes that next year New Zealand's trading partners grow 2.2 per cent, which is exactly in line with the average estimate of overseas economic forecasters in October's consensus survey. Last year trading partner growth was over 4 per cent.
But ANZ National Bank chief economist Cameron Bagrie warned that consensus forecasts struggled to keep up in fast-moving times. They put New Zealand's growth next year at 1.5 per cent, for example, but Bagrie thinks 0.5 per cent is more like it.
The fiscal forecasts officials present this week will undoubtedly be worse than at Prefu time, he said, but they should probably be worse still.
The Treasury's deeper recession scenario also assumes unemployment, currently 4.2 per cent, will rise to 6.1 per cent - a level increasingly expected among private sector forecasters. Partly as a result, it assumes the housing market has a lot further to fall - 25 per cent from peak to trough - hitting consumer confidence.
O'Donovan said retailers had been hoping for a reasonable Christmas. "That's now a forlorn hope. Businesses generally have been laden with a lot of cost pressures over the past year. With the prospects for sales poor, they will be pre-emptive about getting on top of expenses. Unfortunately that means job losses."
Bagrie said the Government should not be afraid to use fiscal policy to shift volatility from household and business sectors to its own accounts. More tax cuts next April had been flagged.
"Additional infrastructure [spending] is likely but the lags are probably too long to influence economic prospects in 2009 which is when the real impact of the global scene will be felt," he said.
There might be a case for bringing forward planned spending on maintenance for state houses and schools.
"While this will result in higher fiscal deficits, with a starting point of net debt of effectively zero, the new Government has a lot of scope to leverage off its own balance sheet."
