Political & Economic week ahead: Bill English, budgeting and that $17bn hole

Finance Minister Bill English is to announce the date of his eighth budget when he appears at a select committee tomorrow.

Opposition MPs will be talking much about what they are calling the "$17 billion hole" which Prime Minister John Key talked about in his Prime Minister's address to Parliament last week.

Although Mr Key did not describe the shortfall as a "hole" – and neither did he say it was all due to the fall in the dairy price – that is the way it is being portrayed.

The $17 billion is over four years and also reflects falls in other prices.

It is a fall in nominal GDP growth, not real GDP growth. And also, it was in the Half Yearly Economic and Fiscal Update the Treasury released in December (slap bang in the middle of the executive summary on page five of that estimable document). It is not a new figure. 

The Treasury is in the process of updating its economic forecasts and they will have a new one. It will probably be better than it looked when the Treasury did that last set of numbers, in late November.

In real terms, that is. 

In nominal terms, GDP will probably have deteriorated.

Why? In real terms, it is because the non-dairy parts of the economy – tourism, manufacturing and construction in particular – are performing much better than expected. 

Several private sector economists have upgraded their GDP forecasts for the next couple of years since the spring. While no one is suggesting New Zealand is on the brink of a boom, the  outlook is looking better than it was. 

In nominal terms, the GDP growth outlook is probably going to be a bit worse than it looked in the spring.

Mostly, this is because price inflation has headed towards zero instead of nudging up toward 1% or so.

That is a fiscal and political problem: It is not so much of an economic problem.

Governments tend to like a little bit of inflation, particularly governments with a thin budget surplus who have hung rather too much on that surplus.

Inflation is also useful for those with a sizable level of debt: it can inflate the numbers down a bit. 

Those gifts from the inflation fairy, which the Treasury’s forecasts included in the December update, are now not going to arrive. 

National’s political decision to make the budget surplus its primary economic target – at least rhetorically – always looked problematic.

Mr English is now putting greater emphasis on reducing government debt. This is really where the emphasis should have been in the first place, even if, in practical terms, it probably would have made little difference.

There will be more on that when he unveils the Budget date tomorrow.

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