Gareth Morgan, Director of Gareth Morgan Investments
The government’s revised fiscal projections confirm a trend noted in our February forecast report and press release on that report made on March 24. To quote from that release,
“National has failed to address the structural weakness in the government accounts, preferring instead to claim a “cyclical” deterioration that will disappear once activity lifts.”
The cold hard facts of the revenue revisions made by the government yesterday are that the revenue base is structurally sick, and ongoing hope that the economic upturn will cure the revenue deficiency, is forlorn. For “structural” read “permanent in the absence of corrective measures”. And specifically, not to be cured simply by an upward swing in the economic cycle. This last point escapes some of the journalistic hacks still excusing the government’s budget ineptitude, preferring instead to swallow the Finance Minister’s falsehood of a deficit under control and the red herring of Treasury’s forecasting inaccuracies.
Ironically, monetary policy has much to answer for the government’s continuing fiscal ills. The fiscal accounts have welcomed eradication of inflation like a hole in the head. Damage done by that policy to budget revenue flows include:
- The impact of fiscal drag – personal tax payments rising as wage inflation moves incomes up through the tax brackets – disappears without inflation.
- The disinflation programme has hit asset prices hard, and the government is no longer taking nominal capital profits from its enterprises into it’s accounts. Indeed, the advent of capital losses has become more frequent. The Fletcher share burden is a good example.
The budget’s structural deficiency can be seen in two areas;
- Personal income tax receipts are likely to show extremely low growth even during economic recovery. The personal tax scale is flatter now, and households are not sharing in this recovery to the extent that has been traditional. Indeed, wage rates are likely to fall in at least real terms, and this will be a non- inflationary recovery.
- Government’s privatisation programme not only reduced debt servicing, but also denied government of dividend receipts from their former enterprises. The evidence to date is interest being paid has not reduced as much as dividends foregone via asset sales.
This leaves the government continuing to push on in search of the financial market’s limits of tolerance. Until the market decides the bond programme is indigestible at current interest rates this government will not incline to budget control. If markets prefer to afford the government the benefit of their fiscal doubts then expect government to expand both their borrowing and tease financial markets with their malfeasance. If however markets express disdain through a reluctance to support the bond tenders, and the currency, then the RBNZ will be compelled to protect their price stability target through tougher short rates. This eventuality might induce the government to impose tax increases – but not until after the election of course. Meanwhile, expect a budget deficit by 93/94 far closer to $5 bn than the “zero”, once dreamed of by Richardson.