https://www.pundit.co.nz/content/budget-2025
Budget 2025
Brian Easton May 23, 2025
Perhaps the state of the economy is not as sound as we are being told.
There was an odd little story over the 2025 Budget, hardly worth
relating except that it tells something about budget politics. The
original invitations to the lockdown, the meeting which gives a
preview of the budget to the media so they can prepare for the release
of what is a complicated set of documents. (Lockdown rules mean their
reporting is embargoed until the budget is delivered in Parliament.)
However, the usual invitation was not extended to analysts �
economists often based in organisations such as the NZCTU and NZ
Initiative � who have the skills to dissect the budget. Perhaps there
was something to hide or the government was trying to manipulate
public understanding. There was an outcry and the government promptly
backed down. The lockdown went ahead, much as it has done for
forty-odd years.
Of course, a budget is a political document but it is founded on the
Treasury�s independent account of the economy, Budget Economic and
Fiscal Update (BEFU). They set it out without comment. The politicians
try to frame perceptions.
Hence the minister�s description of the 2025 budget as being a �Growth
Budget�. It is hard to draw that conclusion from Treasury�s economic
forecasts. The economy seems to be in the recover phase of a standard
cyclical recovery, but the economic track after is markedly below what
it was before the current downturn � perhaps by 6%.
Distinguishing the upswing from the long-term trend is critical.
Remember the distress of the Bolger Government when the strong upswing
ended and the economy toddled along a low growth path? * (It was just
before an election.)
Moreover, the Treasury projections do not see any catch up, and their
projected labour productivity growth rate is about 1% p.a. which is
below the long-run trend of 1.4% p.a.. (In every affluent economy I
follow, everyone reports a lower productivity growth rate so the
slowing may not be unique to New Zealand.)
Illustrating the difficulties of raising the growth rate, the minister highlighted the �Investment Boost� policy, costing an average $1.6b
year, which lifts the per capita GDP growth rate by .05% p.a. over the
next five years (i.e. from 1.275% p.a. to 1.280% p.a.) and by a
similar amount over the following 15 years. In two decades GDP is
expected to be 1% higher because of the new policy.
In fact, there are signals that the economy will struggle with even
that projected growth rate. Much has been made of the government�s
measures to boost social, housing, social and transport
infrastructure. Without adequate infrastructure, economic growth will
stall.
The Treasury projects that its property, plant and equipment
(excluding specialised military equipment and cultural and heritage
assets) will increase 11.1% in real (that is, excluding price changes)
terms between June 2025 and June 2029. Real GDP is expected to rise
11.2% so the public sector investment is barely keeping up with,
rather than driving, growth.
Even so, to fund this investment the government has had to restrain
public consumption to outraged responses from those sectors which have suffered.
This investment adds to the net worth of the government. The Coalition Government has stated an ambition to keep net worth�s level near 40%
of annual GDP. In June 2025 it is expected to be at about 39.9%, down
from 43.2% in June 2024 and 45.3% in June 2023. For a technical
reason, Treasury does not really forecast the ratio for June 2029 but
I estimate it to be about 35.5%, well below its target ambition. **
That means that the government is still borrowing to sustain public
and private consumption. (Public consumption directly, private
consumption insofar as the government can raise taxes to maintain its
public consumption ambitions.)
As a result, the net-debt-to-annual-GDP ratio remains high. It is
currently 42.7%, which is higher than at any time in the last decade.
In 2029 it is expected to be 45.5% of annual GDP. Contrast that level
with the target of 30% (but I remind you I would accept a higher rate,
were the government funding infrastructure). It is also moving towards
the 50% �ceiling� where it is thought lenders would get concerned. As
the Minister has stated, such high debt levels leave little leeway to
borrow to ease us through the next large shock. ***
The commentariat focused on budget winners and losers � as they always
do. Little attention was given to the underlying issue that despite
the government�s cheerfulness it had little room to manoeuvre � that
there had to be serious losers. By highlighting them the commentariat
obscured the main economic issue � the poor underlying economic
performance and that it was not improving.
This column reports a gloomier picture of the state of the economy
than the Luxon Coalition Government is trying to sell. But it is based
on the professional judgments of the Treasury economists and
accountants. Their forecasts will be near the professional consensus;
the Treasury is just more expert, informed and detailed. Even if the government�s 2025 budget sales pitch succeeds, it may find itself
struggling with the 2026 one, a few months before the next general
election.
* Not only the government. One editor complained that nobody warned
him of the distinction between cyclical recovery and long-term
economic growth. Ironically, a few years earlier he had banned from
his newspaper the economists who were already giving that warning.
** The Treasury does not adjust its forecasts of its assets for price increases, but it does for GDP. I have assumed that the asset prices
inflate as the same rate as GDP.
*** Treasury�s draft 2025 Long-term Insights Briefing reports that the
2010-1 Canterbury earthquakes had an identifiable fiscal impact of
11.3% of annual GDP. For the 2020-2 COVID-19 pandemic it was 20.4%.
The briefing gives no estimate for the 1996 Wool Price shock, nor the
2008-9 GFC shock.
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