The economy has come through the initial impact of the Covid-19 pandemic in better shape than expected but faces a tougher and longer road to full recovery, according to the Treasury.
Finance minister Grant Robertson. Photo: RNZ /Dom Thomas
The pre-election opening of the government books (PREFU) showed a budget deficit of $23.4 billion for the year ended June, while the level of debt is marginally better at 27.6 percent of gross domestic product (GDP).
"These are signs that the New Zealand economy is robust, and that our plan to eliminate Covid-19 and open the economy faster is the right approach," Finance Minister Grant Robertson said.
Treasury Secretary Caralee McLeish said the impact of lockdowns was less severe than initially thought.
"The New Zealand economy benefited from earlier than expected lifting of alert level restrictions in the June quarter. Within alert levels, activity appears to be higher than estimated and higher frequency economic indicators suggests that our activity has picked up sooner than expected."
The shorter lockdowns and strong rebound in activity have helped to support government finances with the tax take moderately lower on a year ago, while the initial measures to support households and businesses caused government spending to surge to $108.8 billion.
Robertson said government spending had cushioned the blow of a one-in-100 year shock, which would need to be maintained for the near and medium term.
He warned that the better-than-expected economic and fiscal situation would get tougher and take longer than had been forecast in the May budget.
"There will be tough times ahead for many in our country," Robertson told a PREFU media briefing.
His constant refrain was the dire situation globally and uncertainty in the world economy.
"Predictions and projections based on history have little of substance to tell us about an unprecedented future," he said.
"Overall the near term economic outlook is less negative than that contained in the Budget update while the medium-term outlook is weaker ... the former is a result of an improved domestic performance in New Zealand, the latter the result of a less favorable global environment affecting export prices and global output in New Zealand.
The Treasury has forecast the economy will average annual growth of 2.8 percent over the next four years from a budget forecast of 3.9 percent.
Robertson said the Treasury was anticipating a 16 percent decrease in GDP in the June 2020 quarter.
"[It's] a historically large decline, but much smaller than the almost 24 percent forecast in the Budget update ... this is a global pandemic and it remains ongoing around the world. Many other advanced economies continue to struggle with heavily restricted economies and are having to manage large flare-ups of the virus. Our relative ongoing success in managing the virus still puts us at an advantage.
GDP figures are expected out tomorrow and are almost guaranteed to show a second quarter of declining growth - which would mean recession.
"Officially that doesn't happen till tomorrow but, as I said, I was clear six months ago that we would be in recession and I'm sure we will be," Robertson said.
"How far and how deep that is we'll see the first indications of tomorrow but what I would say is we rebound quickly from that on the forecasts ... as we get into 2021 and 2022, our growth is outpacing our trading partners.
"I do note that in these numbers our unemployment is forecast to peak lower than where Australia is ... our debt for this year will be lower than Australia's is and I do note that our growth going out to 2021 and 2022 will be better than Australia's is."
Treasury has also trimmed its unemployment forecast to peak at 7.7 percent next year after which it gradually declines over the next four years to 5.3 percent.
"This compares favourably with other nations, Australia with around 10 percent, the US and Canada with 13 percent peaks. Budget 2020 forecast that unemployment was going to peak at 268,000, in prefu it peaks at 221,000. That is 50,000 fewer people unemployed," Robertson said.
That is based on an assumption that borders will remain closed until 2022, and that world growth will be lower and slower because of resurgence of the virus around the world.
Consequently government spending and borrowing will remain elevated for sometime.
Announcing the update, Finance Minister Grant Robertson had said the 2022 date was an assumption by the Treasury, not government policy, and the government planned to open borders as soon as it was safely able to do so.
Net debt is now forecast to peak at 55.3 percent of GDP in 2024, marginally higher than in the budget, while budget deficits peak next year at $31.7bn, before reducing to $12.4bn in 2024.
"The government met our target to lower net debt to 20 percent of GDP in both our first two budgets, putting us in a strong position to respond to Covid-19 and still maintain one of the lowest levels of debt in the OECD.
"The borrowing is necessary... but it comes at a cost," Robertson said.
He said the government planned to spend $42bn on infrastructure over the next four years including $12.25bn in this fiscal year alone, compared to $43.7bn over the eight years between 2009 and 2017.
"The answer to our current economic predicament is not to pull back on investment in infrastructure and critical public services that enable us to bounce back as happened during the last downturn. We must continue to invest in our economic recovery and rebuild.
He said the government had $14.1bn uncommitted to be spent on future measures if there should be a significant return of Covid-19 to the country.
"We can afford the debt without cutting key core services... we will manage the books responsibly... we will keep a balance."
He said the government saw a "massively important role" for the Māori economy, with post-settlement iwi in particular helping drive sustainable growth.
He acknowledged Māori would be worse affected by the economic downturn than the wider population.
"In times of recession we see Māori population affected more, that's why we've put significant investments in through our Covid response and recovery fund to supporting Māori households, to boosting Whānau Ora ... but it's also why we need to work incredibly hard to stay down low in the alert levels because that enables the economy across the board to continue to grow."
Read the full report on the Pre-election Economic and Fiscal Update here.