ANALYSIS: Lower for longer. That is the key message and takeout from the release of the government pre-election accounts, known as PREFU.
Growth will be lower, the jobs markets tougher and global outlook grimmer in the long term, despite a rosier outlook for the current year, thanks to getting on top of Covid-19 and getting the wage subsidy and other measures out the door.
Almost six months to the day Grant Robertson stood in Parliament and launched the first massive wave of stimulus payments and economic support, he presented the second update on its fiscal carnage.
According to Stuff calculations based on Treasury figures – and we will have accurate figures on Thursday when the national accounts showing GDP growth come out – the Government will roughly spend the equivalent of 5.9 per cent of the whole economy on its Covid-19 response in 2020.
Grant Robertson as the government unveils its official economic forecast.
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Then it will spend 7.8 per cent in 2021, before falling back away to about a third of that amount by 2022.
That figure could reduce if the $14 billion set aside by Minister of Finance Grant Robertson for the Covid-19 response is not spent.
Nevertheless, it is a massive economic stimulus, and lays bare the size of the fiscal challenge that Covid-19 will present to the Government, most likely Labour or Labour-led, after the October 17 election.
The changes can be summarised as a little bit of good news, followed by a whole lot of bad.
The GDP drop for the June quarter is expected to show a 16 per cent drop, rather than the almost 24 per cent forecast in the May budget.
That shows that in the near term, the economy performed better than expected since the May budget but is expected to perform more poorly from 2021 onwards.
In fact, unemployment is not forecast to peak until early 2022, but at 7.8 per cent, a lower level than the 9.8 per cent predicted for right now in the May budget.
But it is expected to be more persistent and stay higher for longer. The economies of key trading partners are expected to contract by 3.3 per cent over the next year.
This is a result of the Covid-19 pandemic dragging out for longer globally, more economic uncertainty and the border being closed for longer.
Treasury assumes while some level of international travel will be possible from the middle of next year (in the form of bubbles) the border won’t fully reopen until January 1, 2022.
That is an assumption, as the Government’s premium economic agency has to guess normal transmission resumes at some point, and that date seems reasonable.
Robertson was eager to point out the Government would like to move more quickly than that.
Both Secretary to the Treasury Dr Caralee McLiesh and Robertson were at pains to point out the figures are somewhat rubbery, and the forecasts are only based on current knowledge and what seem like reasonable assumptions in an environment that has changed dramatically since the start of this year.
In other words, they should be taken with more than a grain of salt. Because of the changed date of the election – and subsequently the PREFU – the accounts for 2019-2020 have not even been audited yet as per usual practice.
The auditor-general is expected to sign off on these by November, everything going according to plan
Politically, whichever party or parties sit on the Treasury benches come late October will be staring at a sea of red ink, which will require significant fiscal discipline to ensure that debt and deficits under control.
Robertson was at pains to point out extra money spent needs to be borrowed, showing a rhetorical commitment, at least, to paying back debt.
Although the Treasury gave a series of scenarios for growth if there are further lockdowns, the core figures assume New Zealand will be in level 1 some time in the next few weeks until 2022.
Again that’s a reasonable assumption on which to base a model on, but certainly cannot be taken for granted given the proclivity of Labour to err on the side of Covid-19 caution.
Key to the unemployment and debt figures not worsening significantly from Wednesday’s forecasts will be the Government’s ability to response to any future Covid outbreaks, without resorting to further draconian lockdowns.
Going hard and going early has clearly had worked to a large degree.
But it will only really stack up if it is not repeated multiple times. Staring at this reality the Government’s political appetite for health risks may have to loosen with time. The emergence of a global vaccine cannot be relied upon.
All side of politics have basically signed up the Government’s plan: the key difference between National and Labour will be around the extent of the future borrowing, and what it is spent on.
These figures show nothing really unexpected, expect the next Government will have tough choices to make. It will be a tough term in power.