Gareth Morgan, Director of Gareth Morgan Investments
The interest rate risk premium on New Zealand has continued its dramatic rise over the last week, signifying that the Budget was a turning point for financial markets. As a beacon of policy dependability Mr Caygill’s days are over and his budget was testimony that his previous and long-stated promises to deliver an ongoing financial surplus were fiscal flatus. The market reaction to the budget has appropriately confirmed Mr Caygill’s period of stewardship of the Finance portfolio as a flop was of little surprise that the Reserve Bank had to invoke stronger monetary policy to restore some market credibility to New Zealand’s faltering economic policy regime.
The market’s prolonged reaction suggests that there is real concern that the fiscal position stated in the Budget may well turn out being at the optimistic end of possibilities. Of the many growth forecasts recently made public, the Treasury one is in the upper bracket. As is well known, deficit forecasts are subject to wide margins of error anyway- last year the government was too optimistic, and this year’s budget outcome will be subjected to the whims of a new government. The National alternative has a number of fiscal promises in place, and the market will have to wait to see its ability to deliver the more austere of its commitments- it would be a gamble to back National to deliver a better fiscal performance.
Further, the mere fact that the market has decided that Caygill has been misleading the public on his fiscal intentions for such a long period now-since his first declarations that a fiscal surplus would be imbedded by this fiscal year, and his endorsement of the earlier government stance, since abandoned that debt would be reduced by a third- can only fortify the view that NZ is plunging towards a comprehensive economic policy U turn. The politicians know that the electorate wants relief, not in the medium term, but now. For the international creditors who finance our largesse that is of concern.
A shift to expenditure philanthropy now by Labour may well harvest them some perverse sense of political satisfaction through reducing even further the fiscal room for National to get away with their populist, expansive budgetary measures. But meantime the economy is the meat in the sandwich of these political games, with higher interest rates squeezing more life out of an already ailing performance. The market’s decision to take the stick to this recent government deed, coupled with the RBNZ’s decision to emphasise the monetary policy stance, suggests that the ability to politically sustain even a modicum of what became known as “Rogernomics” is fading fast. Mr Caygill’s plea for the banks not to “roll the government’ is bizarre, given that it has been he who has ignited the fiscal capitulation. A market-forced election over this budget could, at the end of the day, improve the chances of NZ avoiding a comprehensive economic policy “U turn”.
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