CTU Media Release

25 October 2011

Government economic management in question after new Treasury forecasts

Treasury forecasts of lower medium term growth in GDP, and unemployment staying higher for longer, show that government has failed to achieve its own economic objectives, let alone improve the position of wage and salary earners, says CTU economist Bill Rosenberg.

There is no doubt that our economy has been affected by the global financial crisis and the earthquakes.

“But the Government has made things worse through poor policy responses. This has resulted in higher unemployment, slow growth in wages, and an unfair burden being placed on low and middle-income earners through the combined effects of cost of living increases and tax changes”.

Unemployment is forecast to be slightly higher than in the Budget forecast, not falling below 5 percent until 2014.

The growth forecast is greatly dependent on the Christchurch reconstruction, which Treasury now thinks will start in the second half of next year rather than the first half. There are continuing risks around its timing. “Following the peak of reconstruction, growth is back to the same levels at which it started. Clearly Treasury does not believe the government is making significant changes to the economy,” Rosenberg said.

“The programme of tax cuts privileging high incomes was never going to be as effective as a stimulus package compared with one aimed at low income earners. This shows in the stagnation in unemployment, and little progress in addressing New Zealand’s economic problems. There have certainly been difficult times over the last three years due, but the government had choices in how it handled these and has made wrong ones.”

“It appears to have abandoned its aim for wages to catch up with Australia. The gap has grown during its term in office. It is not surprising that 106,000 New Zealanders left permanently for Australia over the last 3 years.” Treasury is forecasting a net migration loss for the year ended March 2012, the first since 2001.

“The government books were made $1.1 billion worse in the last year by the so-called tax switch which in fact handed tax cuts mainly to high income people and failed to collect enough revenue to pay for it while hurting low income people most by the 20 percent increase in GST. Budget 2010 had forecast the increase in borrowing required to finance the tax changes would be less than $0.5 billion.

Over optimism in revenue forecasts must throw doubt on when the government will return to surplus. However Bill English made it clear that the Government was determined to keep to its target of surplus by the year ended June 2015 despite “the most rapid fiscal consolidation New Zealand has seen for quite some time.”

“This is likely to mean deeper cuts in public services and in public service jobs,” said Rosenberg. “This is putting finances ahead of people.”

The economy also has problems externally. The forecast is for the current account deficit to continue to rise, reaching 6.9 percent of GDP by 2016, which will continue to increase private international debt. Only 1.9 percent of the deficit is due to the requirements of the Christchurch reconstruction. “With forecasts of flattening or falling export returns, and the trade balance going into deficit again in 2013, it is clear that New Zealand’s biggest current economic problem, the private international debt, is nowhere near being solved”, said Rosenberg.

There are also big worries over where the European and US economies will head. There is a significant possibility of another international recession or financial crisis.

The high exchange rate is identified as a problem for reducing the trade deficit. Treasury has raised its forecasts for the exchange rate significantly since the Budget, but still forecasts it will fall over the period to 2016, contrary to recent experience. This is a problem that remains unaddressed by the government.

“In the meantime, rapid price rises, far ahead of wage and salary increases are leaving more New Zealanders further behind in their standard of living,” concluded Rosenberg.

ENDS

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