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”.
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.
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.