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.
The Core Crown OBEGAL deficit was $8.5 billion, while the Total Crown OBEGAL deficit was $9.2 billion. The latter is equivalent to the Government borrowing just under $2,100 per person in 2011/12.
The OBEGAL deficit is substantially lower than last year’s deficit. But the Government had the unusual event of the Christchurch earthquake, and its contribution towards the recovery and rebuild. So it is not a particularly informative comparison to make, as the reduction in the deficit really has nothing to do with the Government’s financial management. It is simply that the spending impacts of the recovery fell in to the accounts during 2009/10 and 2010/11, and are now falling out of the accounts.
The Government’s efforts at fiscal consolidation have had some impact. The Core Crown OBEGAL coming in $1 billion lower than the Budget forecast (in June) of $9.6 billion for the 2011/12 year. The gains and losses Budget forecast (-$1.5 billion) was way off the actual (-$3.2 billion), so the Core Crown Operating Balance was $572 million worse than forecast at $11.7 billion. Performance from a Total Crown point-of-view was worse than anticipated in the Budget for both the OBEGAL and the Operating Balance.
The RBNZ notes that the “fiscal balancing act over the next few years is to restore headroom through consolidation where possible, while taking into account any adverse short-term impacts on activity.” This ignores the Government’s other economic objectives of increasing productivity and the export-orientation of the economy – that is, kicking the economy up a gear.
The Government’s objectives, given the context it faces, means that to change gear the Minister of Finance will have to take his foot off the accelerator. Aside from Christchurch, the Government is looking to cut its expenditure. This reduces a source of demand in the economy and slows economic activity down. The injection of demand that might come from improving the incentives for productivity – read “tax cuts” amongst other things – is on hold as part of the “fiscal balancing act”. That is, the Government’s short-term priority is to put its own books in order, and improving productivity is a longer term priority and target.
Looking forward, the return to surplus on the Government accounts is likely to be delayed past 2014/15, unless the Minister makes some unsignalled policy calls as, the economy is not about to deliver a surge of growth in output, taxation revenue and automatic reductions in welfare expenditure as people move in to work.
The weak inflation statistics are an indicator that the economy still has a fair amount of surplus capacity. For the year to June 2012, inflation was insipid, with prices rising at less than one percent. The figures for the September quarter will be out in a few days. These figures are unlikely to show a substantial acceleration in inflation, as the indicators elsewhere are that – other than in Christchurch - output growth is weak and employment may be static or contracting.