This month’s fiscal accounts are a story of unexpected revenue, and rosy gains and losses forecasts.
Modest, targeted spending increases sit behind Budget 2013. The Minister of Finance, Hon Bill English, indicated that the Government will return to surplus by 2014/15. Hailed as a budget that was building momentum, Budget 2013 indicates a slow and cautious approach whereby no money will be set aside for capital spending over this and the following three Budgets, and any new capital spending will come from the existing balance sheet.
This note assesses whether progress has been made towards rebalancing the underlying structure of New Zealand’s macroeconomy. We explore five influences driving New Zealand’s macroeconomic imbalances – tradable sector activity, the burden of inflation control, net external trade receipts, expenditure in the domestic sector, and the direction of finance.
The Reserve Bank (RB) left the OCR unchanged at 2.5 percent today (14th March) suggesting that it will stay there “through to the end of the year”.
Treasury lowered its forecast 2014-15 surplus to $66 million (on the Total Crown OBEGAL measure), but is still holding out for a surplus.
The latest food price data release confirms the ongoing decline in food prices. November data shows food prices have been below year-earlier levels for six out of the last seven months, with October being the only exception.
From October 2011 to October this year, food prices have risen 0.3 percent. This is the first rise in food prices since April this year. The main driver behind this rise was increased fruit and vegetable prices.
Food prices eased in September, down by 0.9 percent on the previous month and 0.3 percent on the same month last year. This is consistent with international prices, which are down 4.1 percent on the year. Prices are expected to recover along with the global economy, but also because of unfavourable growing conditions in India, Europe and the US.
As we expected, the risks identified in the Treasury’s July Monthly Economic Indicators squeezed the positives according to the Government’s just released annual accounts for 2011/12. Initially, the latest annual government accounts looked like some positive reading: Core Crown revenue was up 5 percent, and expenses down by 2 percent on their 2011 levels. But in dollar terms, as revenue was only $60.6 billion while expenses were $69.1 billion, the Government ran a deficit.
Food prices increased marginally in August – by 0.1% according to Statistics New Zealand’s latest release of its food price index. The most significant increase came from fruit and vegetable prices, which were 1.5% up in August. Prices for fruit and vegetables tend to rise in winter months and have been rising month on month since April.
Since June this year, food prices have increased by 0.2 percent according to Statistics New Zealand’s latest release of its food price index.
Treasury’s latest Monthly Economic Indicators conclude that the “domestic economy is looking in relatively good shape”, while acknowledging that “the global outlook worsened further in July, with downside risks increasing”. It sees “a pick up in coming quarters” that will see inflation accelerate and spare capacity be absorbed (by growth).
The latest fiscal accounts (for the 11 months to May 2012) have some positives in them, and continue a recent trend of applying discipline (but not austerity) to the government accounts. The following table and figures summarise the actual and forecast Core Crown accounts.
GDP grew 1.1% in the three months to March 2012, taking annual growth to 2.4%. The figure was a positive surprise, incorporating conservative growth in primary and manufacturing industries and nearly flat domestic spending. Looking at the detail however, the quarterly figure was helped by a large increase in the statistical discrepancy. Without this contribution growthbin the March quarter would have been a more modest 0.6%.
The month of June saw food prices increase by 0.2 percent according to Statistics New Zealand’s latest food price index.
In releasing its latest quarterly assessment of prospects for the New Zealand economy, independent forecasters BERL paint a dismal picture for the immediate future.
First, returning the government’s books to surplus by 2014/15 despite an increasing austere global environment is achieved through a forecast surplus of $197 million in that year. This is $1.1 billion lower than last year’s Budget forecast for that year. Thereafter, the fiscal surplus is set to grow further to reach $2.1 billion in 2015/16.
Treasury has released the final set of fiscal accounts before the release of the Budget in about a fortnight. The media release, however, is slightly misleading, as it does not always clearly distinguish when it is referring to Core Crown versus Total Crown figures. So while the government deficit is still bad, the actual figures are perhaps not as bad as one might interpret from a scan of Treasury’s media release.
Treasury regularly publishes data on the monthly tax take – the tax “outturn” data. These publications are usually released about six weeks after the end of the month. It is some of the earliest data available on how the economy is tracking. The data are reported for both “receipts” (cash that has been received by the collecting agency) and “revenue” (tax that is due, but which may not have actually been paid yet). The latter is an accrual measure, and is the most useful for gauging activity.
Alan Bollard believes it is prudent to hold the OCR at 2.5 percent, where it has remained since March 2011.
According to Statistics New Zealand’s latest food price index, overall food prices in March were down 1 percent compared to February. In addition, prices were down for all five broad categories: fruit and vegetables, meat, poultry and fish, grocery food, restaurant and ready-to-eats, and non-alcoholic beverages.
The farm-gate value of dairy, sheep and beef products grew by 58% from $10.2 billion in the 2006/2007 season, to $16.3 billion in the 2010/2011 season – but greater investment in pasture renewal could have boosted growth even further.
The latest financial statements for Treasury for the seven months to January 2012 show a big hole in the fiscal accounts.
The Capital Goods Price Index rose 0.4 percent in the December 2011 quarter, taking the annual increase to 1.1 percent. This slight upward trend follows a very subdued period where the index remains at the same level as the June 2009 quarter.
Overall, food prices in January 2012 didn’t change from December 2011. For the year however, food prices were up by one percent.