Gareth Morgan, Director of Gareth Morgan Investments
The 1992 Budget reveals a most sober official forecast of both the official accounts and the economy. The correct/unemployment rate being forecast over the next two years is over 13% and the budget deficit is forecast to remain above 4% of GDP, despite 3% economic growth, confirming a grotesque structural deficiency in the books. Contrary to the Minister of Finance’s claim that expenditure is under control it’s forecast to rise in real terms.
Let’s look at unemployment. The fantasy workers on Bill Birch’s Think Big employment and training schemes are in the main otherwise unemployed, giving an official unemployment projection of 13% for unemployment by 1993. This underpins the ballooning budget deficit. secondly, look at the deficit itself. Averaging almost 4% of GDP it will not be sufficient for the government debt to GDP ratio to retreat over period of economic recovery. If the deficit were merely cyclical as the Minister has claimed, the debt ratio should be falling now we are in recovery. By postponing progress on shrinking the deficit, the government is risking a budget and hence tax debacle should growth slow down.
Finally, let’s examine government spending. As economic recovery gathers we would expect government spending to automatically fall, primarily as a result of the need for less welfare payments as labour market pressures ease. Spending, in fact, is budgeted to increase by 1% pa in real terms, despite economic recovery. Richardson’s declaration that spending is falling as a percentage of GDP is nothing more than claiming the cyclical, improvement of the ratio as something more meaningful. It’s a ruse designed to coax financial market support. And on this score the Minister must be congratulated.
In summary, I’d argue that the budget deficit is as structurally sick as I’ve claimed previously, and that the financial market is pricing in the assumption that economic recovery will continue – a high risk assumption beyond say, an 18 month horizon. Clearly if the economy’s momentum does falter, the budget deficit will blow very quickly and ratchet the debt ratios up. On the other hand, if recovery does come, then there will be upward pressure on real rates resulting from a clash between private sector borrowing needs and those of this avaricious government. This will sow the seeds of an economic slowdown as high real interest rates choke off investment. In other words, with this deficit she’s dammed if she does and dammed if she doesn’t. That’s the reality of a structural deficit.
A more conservative approach would have been to reduce the budget deficit now, to reduce the chances of unwelcome surprises emerging from markedly different economic growth than forecast in the budget, and to head off any crowding out of private borrowing once it recovers. Rather than adopt the high risk deficit path they’ve taken, they would have been better to have cut spending as first preference, or raising tax on households as second, thereby raising the chances of sustained economic recovery. A post-election tax rise is a certainty.