Budget castles in the air

Written By: - Date published: 8:57 am, May 17th, 2011 - 24 comments
Categories: budget 2011, economy, making shit up - Tags:

The Nats want a quid each way in this budget. Short term doom and gloom to justify cuts and asset sales. Medium term optimism so people can feel good about about the government. To supply the optimism, John Key, Bill English and the Nats are counting on growth. “Projected” growth that is:

Budget will show strong wage and jobs growth – Key

Thursday’s budget will forecast strong wage and jobs growth over the next couple of years, Prime Minister John Key says. Mr Key said the growth in average weekly wages was expected to “well and truly” outstrip inflation, and the Treasury was also forecasting strong employment growth.

Mr Key didn’t give details at his post-cabinet press conference today but told reporters wage growth of between four percent and five percent could be taken as “an educated guess”.

Apparently an early return to budget surplus is tipped! And I have a bridge to sell you! Thank goodness for Bernard Hickey who (as usual) brings us back to earth with a few inconvenient truths:

Take forecasts with grain of salt

It’s amazing what you can promise when you forecast strong growth. If you went to your bank and promised your salary would increase 10 per cent next year, there would be a good chance they would lend you more money. They would probably ask for proof but a letter from your employer would do the trick. This is exactly what John Key and Bill English will do on Thursday when they release the 2011 Budget.

They will forecast strong economic (gross domestic product) growth and explain to our ratings agencies that this growth means our debt-to-GDP ratio over the next couple of years will stay relatively low at below 30 per cent, even though debt is growing at a record rate.

As long as the denominator (GDP) is growing almost as fast as the numerator (debt) then that ratio will stay under control. These growth forecasts will, in effect, be the letter from the employer to show the bank manager’s representative, which in our case is Standard and Poor’s.

That “letter from the employer”, the projected growth, Key’s “educated guess”, all fly in the face of actual experience of the last three years:

Every economic forecast by the Treasury underestimated the impact of an epic change in the way New Zealanders think about debt and spending.

In May 2008, Treasury forecast growth rates for the next three years of 1.5 per cent, 2.3 per cent and 3.2 per cent. Instead, we got -1.1 per cent, -0.4 per cent and -0.1 per cent.

Ouch.

The inaccuracy of these forecasts isn’t just Treasury’s doing. All the economic forecasters have missed out on a structural shift. New Zealanders have stopped borrowing overseas to pump money through the housing market into consumer spending, which makes up almost 70 per cent of the economy.

It has been stalled for three years and there is no indication it is picking up quickly. New Zealand households have got the message that they can’t live beyond their means. Lending growth has stalled and the banks are increasingly desperate in their efforts to encourage households to borrow.

Keep in mind also that we’ve been here before. Last budget the Nats told us that the tax cut bribe was “broadly fiscally neutral”. Hidden in the fine print, and dragged in to the light by Keith Ng, was that fact that they made the claim on the basis of, you guessed it, projected growth. The tax cuts were supposed to cause growth (they didn’t), and the growth was supposed to pay for the cuts (it didn’t). Now here we are with record borrowing and debt instead.

So just remember, when we hear tidings of good news and a return to surplus, that it is all based on growth which is at best hypothetical. At worst it’s just wishful thinking from people with a three year record of being wrong wrong wrong. The whole budget edifice will be a castle built on air.

24 comments on “Budget castles in the air ”

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  1. pollywog 1
    17 May 2011 at 9:17 am

    John Key is full of shit !!!

    • happynz 1.1
      17 May 2011 at 9:24 am

      He certainly is! The National government’s past performances suggest that the rosy projections trotted out can’t be taken seriously.

  2. PeteG 2
    17 May 2011 at 10:10 am

    So just remember, when we hear tidings of good news and a return to surplus, that it is all based on growth which is at best hypothetical.

    Yep, all forecasts are hypothetical but we still need to have them. Maybe they should predict more recession and things will come right.

    The tax cuts were supposed to cause growth

    Yes, hypothetically – but we don’t know if they averted further recession, things (hypothetically) could be much worse (or better) without them. Policy implementation is all poke and hope, that’s simple reality.

    If poor people are struggling so much now has WFF been a costly failure?

    • Lanthanide 2.1
      17 May 2011 at 10:24 am

      “Yep, all forecasts are hypothetical but we still need to have them. Maybe they should predict more recession and things will come right.”
       
      Or maybe they should look at their past performance, ask “why were we so far off last time?”, investigate and understand the problem and then use that to make future forecasts.
       
      You know, like any (sensible) private business would do if they had 3 years of poor sales figures.
       
      There’s absolutely no evidence that they’ve done this.

      “If poor people are struggling so much now has WFF been a costly failure?”

      No, because clearly WFF kicked in many years ago. Lets try and imagine, hypothetically, what the last 8 years would have been like without WFF, shall we? Better, or worse, for “poor people”? Let’s take an educated guess and say “worse”.

    • Anthony 2.2
      17 May 2011 at 10:37 am

      Oh god, all this again… It’s the stock standard of the right when confronted with real world evidence that the economic model they subscribe to doesn’t work.

      “It did work, things would have been worse without tax cuts!”
      “It did work, things would have been worse without _ _ _ _ _!”

      *this comment contains adjustment for macroeconomic effects

    • onsos 2.3
      18 May 2011 at 11:01 am

      The Treasury has not just been consistently wrong in its predictions for the National government, it was consistently wrong for Labour, too. The difference is that it consistently underestimated economic and job growth, then, which is quite the opposite of now. Why the persistent pro-National bias?
      My working theory is that Treasury consistently over-estimates the impact of tax rate changes–particularly high income and corporate tax rate changes–and under-estimates the stimulatory impact of government expenditure.
      This would be in keeping with its general adherence to dubious supply-side understandings of economics. There should be a proper investigation of this; Treasury is unduly influential, and does not appear to understand its core discipline.

      • Colonial Viper 2.3.1
        18 May 2011 at 11:12 am

        Treasury is staffed with neo-liberal economic *****’s who still believe that people are all economically rational actors and that free market forces always act to reach a competitive and economic equilibrium. Treasury should be broken up and sold.

        Problem is, its not worth anything to the country, or to any perspective buyer. More likely, it would be valued as a liability.

  3. Lanthanide 3
    17 May 2011 at 10:22 am

    Whenever John Key is confronted with someone saying that tax cuts haven’t covered the GST increase, he just says “We don’t agree with that”.
     
    Ignoring the use of the Royal We, what Key is effectively doing is saying “we have this piece of paper on it that has the maths all worked out. You are mathematically better off after the tax switch. It doesn’t matter what you are actually experiencing in reality – the maths says you’re better off, so you’re better off”.
     
    The exact same reasoning is used for defending the tax cuts – the piece of paper says they’re fiscally neutral, so they are. The fact that we need “broader economic effects” to sop up the deficit, and that the term itself is completely impossible to actually measure in any meaningful way, means that they can simply say “we would be worse off now if we didn’t have the tax cuts” and the media will simply repeat it, because they can’t be bothered to actually hold them to account for anything.
     
    Expect more of the same stemming from this budget – the forecasts of huge growth will be his defence against any negative attacks in the future.

  4. Afewknowthetruth 4
    17 May 2011 at 10:39 am

    Since all Treasury forecasts are fantasies made on the basis of fraudulent and delusional economic theory, which ignores all real world factors, we can never regard them as anything other than a sick joke being played on society.

    The worldwide economic and social implosion, due to overpopulation, overconsumption, peak oil, resource depletion, environmental degradation etc. will continue whatever the clowns and criminals in government say or do.

  5. ak 5
    17 May 2011 at 10:44 am

    Well fair enough, the “aggresive recovery in 2010” didn’t quite pan out for our financial wizard, so back to basics:

    Last time it was Helenhate and the promise of over $50 a week.

    But this time Helen’s gone and the country’s broke.

    So it’s promise a 5% wage increase, and Maori-bash via a bedmate.

    Divide and promise, and flood it through the airwaves. The tried-and-true Key to success.

    • Pascal's bookie 5.1
      17 May 2011 at 11:00 am

      And that 5% increase in wages and salaries will be factored into income tax projections and through that to the forecast deficit number. When salaries don’t meet the hope, a slashing we will go. ‘Not our choice mate! Hoocoodanode?’

      • Armchair Critic 5.1.1
        17 May 2011 at 11:04 am

        Maybe National could put their money where their prediction is and legislate for a compulsory 5% pay rise for everyone. If it’s gonna happen anyway there won’t be a problem.

  6. randal 6
    17 May 2011 at 12:25 pm

    National is supposed to be the party of business so where is the new business?

    • Draco T Bastard 6.1
      17 May 2011 at 1:20 pm

      They haven’t been the “party of business” for a long time. What they are now is the Party of the rich with an over developed sense of entitlement (otherwise known as psychopaths).

      • PeteG 6.1.1
        17 May 2011 at 1:41 pm

        Same as Labour haven’t been the “party of workers” for a long time? What they are now is the
        Party of the beneficiaries with an over developed sense of entitlement?

        • Colonial Viper 6.1.1.1
          17 May 2011 at 1:58 pm

          What they are now is the
          Party of the beneficiaries with an over developed sense of entitlement?

          There are hundreds of thousands of New Zealanders young and old living in poverty, living in the cold, houses destroyed and their workplaces wrecked, feeding themselves on food banks and cat food, and you think that they are choosing this way of living in this rich country because of a sense of entitlement and a lifestyle choice?

          Fuck off.

          • terryg 6.1.1.1.1
            17 May 2011 at 3:24 pm

            but CV, at least a few hundred of these will be scumbags, criminals or whatever. therefore its OK to stomp on the other several hundred thousand.

            In much the same way as police reporting on drink drive blitzes and how “the message is not getting through”. Every time they do a big blitz, I do a simple calculation (no.booked/no.stopped) and it shows that > 99% of kiwis are obeying the rules.

            Mondays Herald article marks the FIRST TIME I have seen a “journalist” do that calculation. And of course Blue Power dont let that interfere with their narrative.

        • Draco T Bastard 6.1.1.2
          17 May 2011 at 2:04 pm

          Wow, you bought the bene bashing line from the psychopaths National as well.

        • Zaphod Beeblebrox 6.1.1.3
          17 May 2011 at 4:19 pm

          What, pensioners?? Or are you talking about people with disabilities?? Or just those who have shares in Finance Companies or AMI policies?

        • Kevin Welsh 6.1.1.4
          17 May 2011 at 4:59 pm

          Or the tens of thousands who have lost their jobs through no fault of their own.

          Still pretending to sit on that fence PeteG?

        • KJT 6.1.1.5
          17 May 2011 at 5:25 pm

          No. That is the National party.

          Some of the biggest beneficiaries. Hotchin, Watson, Kerr, Key, Brash, big SCF insider traders, private broadcasters, grossly wealthy, farmers, offshore corporates, executives, and soon the people who will be gifted our assets at fire sale prices.