Perhaps the state of the economy is not as sound as we are being told.
There was an odd little story over the 2025 Budget, hardly worth relating except that it tells something about budget politics. The original invitations to the lockdown, the meeting which gives a preview of the budget to the media so they can prepare for the release of what is a complicated set of documents. (Lockdown rules mean their reporting is embargoed until the budget is delivered in Parliament.) However, the usual invitation was not extended to analysts – economists often based in organisations such as the NZCTU and NZ Initiative – who have the skills to dissect the budget. Perhaps there was something to hide or the government was trying to manipulate public understanding. There was an outcry and the government promptly backed down. The lockdown went ahead, much as it has done for forty-odd years.
Of course, a budget is a political document but it is founded on the Treasury’s independent account of the economy, Budget Economic and Fiscal Update (BEFU). They set it out without comment. The politicians try to frame perceptions.
Hence the minister’s description of the 2025 budget as being a ‘Growth Budget’. It is hard to draw that conclusion from Treasury’s economic forecasts. The economy seems to be in the recover phase of a standard cyclical recovery, but the economic track after is markedly below what it was before the current downturn – perhaps by 6%.
Distinguishing the upswing from the long-term trend is critical. Remember the distress of the Bolger Government when the strong upswing ended and the economy toddled along a low growth path? * (It was just before an election.)
Moreover, the Treasury projections do not see any catch up, and their projected labour productivity growth rate is about 1% p.a. which is below the long-run trend of 1.4% p.a.. (In every affluent economy I follow, everyone reports a lower productivity growth rate so the slowing may not be unique to New Zealand.)
Illustrating the difficulties of raising the growth rate, the minister highlighted the ‘Investment Boost’ policy, costing an average $1.6b year, which lifts the per capita GDP growth rate by .05% p.a. over the next five years (i.e. from 1.275% p.a. to 1.280% p.a.) and by a similar amount over the following 15 years. In two decades GDP is expected to be 1% higher because of the new policy.
In fact, there are signals that the economy will struggle with even that projected growth rate. Much has been made of the government’s measures to boost social, housing, social and transport infrastructure. Without adequate infrastructure, economic growth will stall.
The Treasury projects that its property, plant and equipment (excluding specialised military equipment and cultural and heritage assets) will increase 11.1% in real (that is, excluding price changes) terms between June 2025 and June 2029. Real GDP is expected to rise 11.2% so the public sector investment is barely keeping up with, rather than driving, growth.
Even so, to fund this investment the government has had to restrain public consumption to outraged responses from those sectors which have suffered.
This investment adds to the net worth of the government. The Coalition Government has stated an ambition to keep net worth’s level near 40% of annual GDP. In June 2025 it is expected to be at about 39.9%, down from 43.2% in June 2024 and 45.3% in June 2023. For a technical reason, Treasury does not really forecast the ratio for June 2029 but I estimate it to be about 35.5%, well below its target ambition. **
That means that the government is still borrowing to sustain public and private consumption. (Public consumption directly, private consumption insofar as the government can raise taxes to maintain its public consumption ambitions.)
As a result, the net-debt-to-annual-GDP ratio remains high. It is currently 42.7%, which is higher than at any time in the last decade. In 2029 it is expected to be 45.5% of annual GDP. Contrast that level with the target of 30% (but I remind you I would accept a higher rate, were the government funding infrastructure). It is also moving towards the 50% ‘ceiling’ where it is thought lenders would get concerned. As the Minister has stated, such high debt levels leave little leeway to borrow to ease us through the next large shock. ***
The commentariat focused on budget winners and losers – as they always do. Little attention was given to the underlying issue that despite the government’s cheerfulness it had little room to manoeuvre – that there had to be serious losers. By highlighting them the commentariat obscured the main economic issue – the poor underlying economic performance and that it was not improving.
This column reports a gloomier picture of the state of the economy than the Luxon Coalition Government is trying to sell. But it is based on the professional judgments of the Treasury economists and accountants. Their forecasts will be near the professional consensus; the Treasury is just more expert, informed and detailed. Even if the government’s 2025 budget sales pitch succeeds, it may find itself struggling with the 2026 one, a few months before the next general election.
* Not only the government. One editor complained that nobody warned him of the distinction between cyclical recovery and long-term economic growth. Ironically, a few years earlier he had banned from his newspaper the economists who were already giving that warning.
** The Treasury does not adjust its forecasts of its assets for price increases, but it does for GDP. I have assumed that the asset prices inflate as the same rate as GDP.
*** Treasury’s draft 2025 Long-term Insights Briefing reports that the 2010-1 Canterbury earthquakes had an identifiable fiscal impact of 11.3% of annual GDP. For the 2020-2 COVID-19 pandemic it was 20.4%. The briefing gives no estimate for the 1996 Wool Price shock, nor the 2008-9 GFC shock.