The PREFU paints a pretty dismal picture of the economy, as many commentators were quick to point out. Here’s Duncan Garner:
Pre-election fiscal update paints bleak picture
The Government has opened the books today in what’s called the pre-election update to give all the parties a look at the true state of the economy. None of it is particularly pretty …
Economic growth will average 3 percent for the next three years on the back of the rebuild – and it fails to peak at 4 percent like Treasury predicted in the budget.
This year’s $18.3 billion deficit will be wiped out within three years, and the Government says it hopes to post a $1.5 billion surplus by 2014/1015 – but only by doing some serious slashing in Government spending. It’s Bill English code for “cuts are coming”. “It’s really been in the last budget that we signalled fiscal tightening,” he says, “and over the next three years you will see a rapid fiscal tightening – the largest New Zealand has seen for some time.” …
So Mr English himself said today hopefully we can muddle through this talk of a second recession – hardly confidence-inspiring stuff.
Two things on slashing spending. (1) It makes things worse, not better. (2) It ignores the elephant in the room, that the government has the alternative option of raising its revenue (e.g. via increases in top tax brackets and broadening the tax base with a CGT, both Labour policies). That’s all business as usual under the Nats of course. But for some truly scary reading, see Tracy Watkins:
Grim forecast for New Zealand’s finances
After Treasury opened the books on yet another gloomy forecast, it is tempting to ask whether things could get any worse. Well, yes, is the short answer. In a case study presented by Treasury in today’s Pre-election Fiscal Update (prefu) as one extreme scenario, we are caught in a downward spiral that ultimately results in the Government being so bust it can’t pay its bills. …
Under its downside scenario, a failure on the part of Governments to contain the Euro crisis, causes a severe disruption to global funding markets, and a prolonged period of “sub-potential growth” in the global economy. …
In the “one in five” downside scenario painted by Treasury, a protracted global recession sparked by the euro zone crisis, coupled with the limited ability of countries to support their economies through fiscal and monetary policy as they did in 2008, affects exports and tourism, leading to a rapid deterioration in the current account deficit, lower tax revenue and a $14.5 billion hole in tax revenue by 2016. Under this scenario, core crown debt also rises steeply, to 35 per cent of GDP in the year ending June 2016.
Treasury does not overstate the risk of this “downside to the downside” scenario occurring but notes: “Overall historic forecasting performance suggests that there is at least a one in five chance of an outcome worse than that captured in the downside scenario. Indeed there are a number of risks for the economy over and above those captured in the scenario.”
A one in five chance of a Eurozone crisis, which triggers a worst case scenario? I wonder if anyone in Treasury has been keeping an eye on the headlines recently:
Financial crisis has world teetering on the brink
As Greece faces default, where is Europe’s firewall?
Eurozone ‘is heading for recession’
Eurozone recession may have already started
Eurozone crisis is dragging UK into double-dip recession, warns Bank of England expert
Britain in grip of worst ever financial crisis, Bank of England governor fears
Crisis In Europe Puts Global Economy In Danger
Eurozone debt crisis: 5 days to save world economy from catastrophe
And on and on and on it goes. With all due respect to Treasury, their estimate of one in five odds looks like it was made with their heads stuck firmly in the sand. We should be preparing for the worst case scenario now. And we really can’t afford to leave it to these useless, unimaginative, slash and burn Nats to face this challenge.