Red ink as far as the eye can see

Treasury's pre-election update gave political parties a sense of the economic damage wrought by Covid-19. The short-term news was better than expected, but the bleak long-term picture leaves little room to maneouvre, Sam Sachdeva writes

Oh, for the days when GDP growth of 2.3 percent was a downer.

The 2017 Pre-Election Economic and Fiscal Update (PREFU), overseen by Treasury Secretary Gabriel Makhlouf and Finance Minister Steven Joyce, was at the time seen as a damp squib by politicians itching to make spending promises.

That sentiment seems almost laughable now when set against the massive challenges outlined in the 2020 iteration by their respective successors Caralee McLiesh and Grant Robertson.

Crown debt is expected to peak at more than 55 percent of GDP in 2023/24, while there is red ink as far as the eye can see.

Treasury is predicting deficits until at least 2033/34 - the outer bound of its medium-term projections, which Robertson was quick to caution were not as accurate as its shorter-term forecasts.

There were some faint glimmers of good news in the here and now.

While GDP figures for the June quarter won’t officially be revealed until Thursday morning, McLiesh said Treasury expected a 16 percent contraction - still historically bad, but much better than the almost 24 percent forecast in May, thanks to early moves out of lockdown and higher than anticipated levels of economic activity at the various alert levels.

But with short-term gain comes long-term pain: namely, a slower recovery with more persistent effects on unemployment rates, thanks largely to the dire straits faced by New Zealand’s major trading partners and the world as a whole.

Unsurprisingly, Robertson chose to emphasise the positive aspects while his political opponents were more keen to look to the longer term and less willing to chalk up the forecasts to the whims of the global economy.

National leader Judith Collins will outline her party's fiscal plan later this week. Photo: Lynn Grieveson.

National leader Judith Collins sought to compare the June GDP figures unfavourably with Australia, which recorded a decline of only seven percent during the same period.

But as Sky News journalist Jackson Williams noted, those figures do not account for the effects of Victoria’s second, stringent lockdown in July and August, which could hint at the potential downsides of a less restrictive approach.

National, and ACT, are fair to note that the Government’s vast spending on the wage subsidy scheme and other fiscal initiatives have provided an artificial boost to the economy that cannot be sustained forever.

But the question, for National in particular, is what exactly it would have done differently to put the books in a better shape given the global headwinds that cannot be controlled from our shores.

Collins decried the 15 years of deficits laid out in the PREFU projections, but National supported the wage subsidy which accounts for a large chunk of the Government’s Covid borrowing, while it has also backed greater infrastructure spending.

While he was technically wearing his ministerial hat, Robertson couldn’t resist a dig at National during his PREFU remarks, accusing the party of a fiscal “Bermuda triangle” where they would simultaneously (and improbably) increase spending, reduce revenue and cut debt levels.

Where John Key and Bill English sought to stoke fears about taxation by stealth, Robertson and Jacinda Ardern have instead opted for their ideologically equivalent boogeyman of a National government hacking and slashing away at public services.

It is a strategy Labour knows all too well, having been on the receiving end of such an electoral approach during the last National government.

Where John Key and Bill English sought to stoke fears about taxation by stealth, Robertson and Jacinda Ardern have instead opted for their ideologically equivalent boogeyman of a National government hacking and slashing away at public services.

Collins and her finance spokesman Paul Goldsmith have furiously denied such claims, but whether National’s triangulation is sustainable will become more clear when the party releases its own fiscal plan later this week.

Goldsmith was giving little away on Wednesday, although it is hard to see how the party’s already improbable target of reducing debt to 30 percent of GDP within a decade “or so” can be retained.

And the fiscal plan is unlikely to put an end to the political scrapping, given Labour’s own, independently-costed plan in 2017 failed to stop Joyce from crowing about an $11.7b “fiscal hole”.

In truth, whoever holds the Treasury’s purse strings after October 17 will be placed in an unenviable position.

There is plenty of debt to deal with, and few easy solutions while the global economy is still facing so much uncertainty.

All parties were quick to push back against Treasury's gloomy assumption that border restrictions would not lift in full until 2022, while its even worse "alternative scenario" - of indefinite border restrictions forced by the inability to find a vaccine - does not bear thinking about.

Labour will be hoping voters focus more on its handling of the Covid crisis to date, and less on the uncertain future that lies ahead.

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