The Government has opened its books revealing that spending on COVID-19 was $4 billion less than expected, unemployment will peak at 7.8 percent in the next two years, and Treasury’s predicting border restrictions will lift in January 2022.
The Pre-Election Economic and Fiscal Update (PREFU), the first official financial update from the Government since the Budget in May and the last before the election, has revealed that the economy is doing better than had been forecasted.
It shows how COVID-19 spending was $4 billion less than expected. The Government unveiled a $12 billion package in March in response to COVID-19 and a revealed a further $50 billion fund in the Budget – a combined $62.1 billion response.
But the Government’s books show how only $44 billion worth of funding decisions have been made, while $14 billion has been left unallocated for a rainy day. That means the Government has spent $4 billion less than expected.
Treasury expects the $14 billion of unallocated money to be spent and the Government is plannig to save it in case of another COVID-19 outbreak, while the National Party is promising to spend it on infrastructure if elected.
It’s not to say New Zealand is in for an easy ride. Treasury expects the unemployment rate to peak at 7.8 percent in the next two years, however that’s lower than the peak of 9.8 percent that was predicted in the Budget.
Finance Minister Grant Robertson said the 7.8 percent figure is worrying. In the next two years the dole queue will blow out to 279,000 people. But Robertson said that’s why the Government has invested in making trades training and apprenticeships free.
Unemployment unexpectedly fell from 4.2 percent in March to 4 percent in June, which was partly attributable to measurement challenges encountered by Stats NZ during lockdown.
However, financial support measures are also expected to have played a large role in supporting household incomes, particularly the wage subsidy scheme which has dished out around $13 billion so far.
The Government is bracing for the “biggest deterioration” in its finances in the coming year, as tax revenue falls and the impact of the Government’s billions of dollars of financial support for Kiwis takes full effect.
But Treasury expects border restrictions to be lifted on January 1 2022, and by that time economic activity is tipped to pick up, resulting in an uplift in tax revenue leading to deficits narrowing from $31.7 billion in 2020/21 to $12.4 billion by 2023/24.
Robertson said Treasury’s expectation for the border restrictions to lift in 2022 is not what the Government is going by because of the unpredictability of COVID-19.
“Policies like the wage subsidy, business tax refunds and small business cashflow loans protected jobs and kept businesses going,” Robertson said. “Taking on debt to fund this response is the right thing to do as we fight COVID-19.”
How much debt are we in?
The Government calculates debt by comparing what it owes with what it produces, or its gross domestic product (GDP). Net core Crown debt to GDP was 27.6 percent at June 30, lower than the 30.2 percent forecasted in the May Budget.
Net core Crown debt is expected to reach 55.3 percent by 2023/24, up from the 53.6 percent which had been forecast. However it’s still much lower than some other advanced countries facing net debt averaging 80 percent of GDP.
In the 2019/20 financial year, the Government recorded a deficit of $23.4 billion, while net debt increased by $25.7 billion to be $83.4 billion. The deficit is expected to worsen to $31.7 billion in 2020/21, and then start to recover.
Treasury expects GDP to drop by 16 percent in the June 2020 quarter, described as a “historically large decline”, but smaller than the 24 percent forecast in the Budget.
The 16 percent drop compares to Kiwibank’s prediction of a 12.5 percent drop for the quarter, ASB’s 11 percent prediction and NZIER’s 10.5 percent expected drop.
How will this impact housing?
The housing market has been more resilient than expected throughout the COVID-19 slump, but border restrictions are likely to constrain migration to New Zealand in the short-term and lead to less demand for housing.
Because of that, Treasury forecasts a period of weaker house prices over the year to June 2021, with prices expected to fall by 5.1 percent from their March 2020 levels.