Deutsche Bank: NZ Pre-Election Fiscal Update

Deutsche Bank: NZ Pre-Election Fiscal Update Preview

Deutsche Bank
Economic Note (New Zealand) NZ: Pre-Election Fiscal Update Preview

The Fiscal Responsibility Act obliges the NZ Government to publish an updated fiscal outlook 4-6 weeks prior to an election. With the election scheduled for 27 November, the fiscal update will be published on 21 October.

As far as changes to the real economy outlook since the May Budget are concerned, the key issues are the size of the GDP downturn in the June quarter (-0.3% qoq), as well as the significant further improvement of the trading partner growth outlook. While the mid-year GDP weakness will lower the measured growth rate for 1999/00, we expect the Treasury to revise up its GDP profile going forward. That will be based on the activity rebound suggested by a wide range of September quarter indicators, as well as the improving export outlook. However, given the Treasury's usual caution, that upward revision is likely to fall short of our own outlook for growth.

The Treasury will also revise up its inflation profile, taking into account latest moves in petrol and car prices. We expect a projection of annual inflation reaching 2.6% by Q1/2000, up from 1.7% in the May Budget Forecast. While most commentators expect the RBNZ to produce a similar number in its 17 November statement, there is the potential for adverse market reaction to that part of the Treasury forecasts.

GDP Outlook

(aa% change, March years)::::: 98/99::::99/00::::00/01::::01/02::::02/03

Treasury May Forecast::::::::::-0.3:::::2.9::::: 3.5::::: 3.0::::: n/a

Expected Treasury fc update::::-0.2:::::2.4::::: 3.8::::: 3.3::::: 2.8

Deutsche Bank forecast:::::::::-0.2:::::2.6::::: 4.2::::: 3.4::::: n/a

Source: DB Global Markets Research, Treasury

Several opposing influences will impact on the fiscal outlook:

1. the stronger GDP growth profile going forward (there was no noticeable influence of the mid-year economic weakness on September quarter tax flows);

2. the $400m tax cut foreshadowed by the National Government (although it would not take effect if there was a change of government, it is currently policy, which means that it has to be included in the projections);

3. the cost of New Zealand's involvement in the peace keeping effort in East Timor;

4. a range of smaller expenditure initiatives announced since May; and

5. the likely reduction of the projected provisions for future expenditure initiatives.

As far as the higher inflation outlook is concerned, there is likely to be a neutral effect on the fiscal balance. Overall, we expect the Treasury to revise down its fiscal profile by only a small amount.

Operating Surplus Projection (% of GDP, June years):::::

::::::::::::::::::::::::::::::::::::98/99::::99/00::::00/01::::01/02::::02/03

Treasury May Forecast:::::::::2.2::::: 0.0::::: 0.7::::: 1.3::::: n/a

Expected Treasury fc update 1.8::::: 0.0::::: 0.5::::: 1.2::::: 1.9

Deutsche Bank forecast::::: 1.8::::: 0.2::::: 0.9::::: 1.5::::: n/a

Source: DB Global Markets Research, Treasury

Ulf Schoefisch, Chief Economist, New Zealand, (64) 9 351-1375

ENDS

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