Treasury has delivered the Government an early Christmas present, portraying a relatively rosy picture for the New Zealand economy, with smaller deficits, lower unemployment and stronger growth for years to come.
In the space of three months since the pre-election update, Treasury has slashed its expectations for how big a deficit the Government is expected to run in 2021 by a little over $10 billion (albeit to a still bad $21.6b).
The best news for Finance Minister Grant Robertson is likely to be expectations for unemployment.
While the rate of joblessness is still expected to climb over the next 12 months, unemployment is now seen to be peaking at 6.9 per cent at the end of 2021.
That is almost a full percentage point to the pre-election update – for a peak of 7.8 per cent – and profoundly better than expectations that it could be almost 10 per cent by now, back at May’s Budget, when New Zealand was just exiting lockdown.
As the Government’s wage subsidy programme has come to an end, the resulting business closures or layoffs have not been nearly as bad as feared.
Economic growth is expected to return in 2021 – albeit modest at less than 2 per cent – climbing close to 4 per cent by 2024.
In general terms, Treasury pointed to stronger employment and spending predictions as the basis for the Government taking in more revenue from tax and spending less on benefits than was expected a few months ago.
Treasury is also coming to the view that the impact of Covid-related lockdowns is not as large as was previously feared.
Treasury secretary Caralee McLiesh said even the current forecasts may turn out to be too pessimistic.
The forecasts were finalised in mid-November, but the data on spending and employment had been consistently better than expected ever since, so much so that there was now a “material upside risk” to its expectations for employment and economic growth.
House price growth 'robust'
For those hoping Covid may provide relief from climbing house prices, Treasury offers no encouragement.
At the time of May’s Budget and at the pre-election update, house prices were forecast to show at least a small drop, as migration dropped close to zero and unemployment rose.
But the stronger-than-expected labour market now has the Treasury predicting that while “a slowdown in house price inflation is still expected, it is now forecast to remain robust” until at least 2025.
That could see the average house price climb by more than 30 per cent over the next five years.
Robertson – presumably knowing the Treasury forecasts were likely to fall this way – has already asked Treasury to come up with advice on how to deal with the rising political issue.
While the forecasts are much better than they were a few months ago, they come with challenges. As the picture improves, the Government will come under more pressure to take address other issues, from housing to climate change and poverty.
The figures also appear to bake in an assumption that not only are things better than was feared back in March through to May, that they will continue to beat expectations. The assumptions continue to assume that New Zealand continues to keep Covid out.
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