Gareth Morgan, Director of Gareth Morgan Investments
December 17 has rolled around again and once more proved to be an exciting date on our annual political economic calendar. Yesterday saw the government acknowledge its fiscal plans for 1991/92 have been blown asunder. The release of the Treasury’s three year projections, and the Reserve Bank’s two year forecasts have come hot on the heels of the private sector forecasts released over the past two weeks.
The official forecasts are notable on two counts;
- They incorporate a drastically revised set of fiscal forecasts for 1991/92, pointing now to a deficit blowout of $1 bn.
- They both suggest, again, that economic recovery is just one more year out. So hold on again folks, just one more time. Again officials have a markedly more optimistic view on this count than the private sector forecasts.
The fiscal blowout incorporated in both official forecasts are miraculously close. The culprit is the lower activity now expected for 1991/92 and the effect of this on projected tax revenues. The most critical aspect of yesterday’s official view though is the Minister of Finance’s description of the new deficit figure as “satisfactory”. Coming from the person who vehemently asserted at this time last year, that deficit eradication was a necessary precursor to economic recovery, such an utterance is transparently incompetent. Either you believe the deficit should be eradicated as a prelude to sustained recovery, or you believe its elimination will make worse current recession. Richardson apparently holds both views, depending on December she’s asked. Credibility has vanished, and with that may well come a downgrade now. After all, the official fiscal projections for the second year out, 1992/93 of around $2 bn are reliant on growth forecasts significantly more bullish than those emanating from the private sector. This aspect of official forecasts has become a tradition.
From a credit rating perspective, even acknowledging there is more financial market tolerance of budget deficits now that economic growth is universally weaker, the about-face of the NZ government on this issue is seen as driven primarily by political factors. If the weaker growth forecasts made by the private sector are taken as more reliable- and the last three year’s performance would suggest this is reasonable, then the implied budget deficits for 1992/93 and 1993/94 will be of the order of $2.5 bn and $2.8 bn. And these figures are interim- they assume no more fiscal steroids will be injected by the embattled National regime. They will.
For Richardson, a 1993/94 position of $2.8 bn at a minimum, rather than balance has to be total ignominy. She does not wear her new Keynesian crown comfortably, given the conviction with which she preached fiscal prudence to the financial markets before her political support vanished. As a fiscal cockatrice she’s suited; presiding sublimely over fiscal corrosion invites financial market retribution. For government the choices now are;
- Reaffirm the commitment to fiscal responsibility and debt reduction. Here Richardson can regain credibility.
- Continue to flout fiscal care. Here Richardson must go- she’s an awkward political sycophant Then impose tax increases to avert a downgrade.
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