Both National and Labour are relying on Treasury forecasts of household and business investment growth happening at the same time as falling house prices. These are the forecasts Finance Minister Nicola Willis is using in the election campaign to say her Government’s policies will create 220,000 jobs over the next four years. The trouble is Treasury forecast in Willis’ first Budget in 2024 that it expected 258,000 over the next four years, but the economy has instead delivered no jobs growth. (See charts below, along with analysis below and in the videos above and below.)
That’s because Treasury’s forecasts for household and business spending and investment were also wrong, along with its forecasts of house prices, Budget deficits and debt reduction. Essentially, Treasury’s models don’t see the economy as a housing market with bits tacked on, and have failed to adjust their models for the economy’s failure of the last two years to deliver growth. (See charts below, along with analysis below and in the video above.)
In my view, that failure is due to the wealth effect on consumers of sharply lower and still falling house prices, along with the effects of cost-of-living shocks from higher fuel, electricity and food prices on consumer spending behaviour. Treasury’s models are not accounting for that wealth effect, as evidenced by their current Pre-Election Fiscal Update forecast for spending, investment and jobs growth over the next two years, at the same time as falling house prices.
The implication is the economic and budgetary strategies of the incoming Government, regardless of whether it’s led by National or Labour, are based on flawed assumptions that the economy can grow at the same time as both Government spending is falling as a share of GDP and housing wealth is falling.
Neither party is proposing to change the underlying tax incentives or infrastructure funding settings that have created the machinery of this housing market with bits on. That means Aotearoa’s political economy is sleepwalking into yet more years of stagnation, self-reinforced by repeated doses of Government spending cuts, restricted public investment and a lack of household and business confidence necessary for spending and investment growth.
I spoke with Jane Yee about this yesterday for NZ Herald’s Front Page here:
(I have opened this one up to all immediately because it’s topical. Thanks in advance to our paying subscribers who enable me to do this sort of work. Join us as a subscriber if you’d like to see more of this sort of work. Here’s a 50% off introductory offer for new subscribers for the first year.)
The charts that show how Treasury’s forecasts have been wrong
Top Picks n’ Mixes
Top Six Scoops & Breaking News items of the Day
* Louisa Steyl for Southland Times-$: Southern wait times worst in NZ
* Federico Magrin for Southland Times-$: Shane Jones set to open new kina factory owned by NZ First donor
* Sinead Gill for The Press-$: Braydon Hepworth’s death prompts another Christchurch City Mission resignation and call for change
* Alice Peacock for Newsroom Pro-$: Employment Court closes loophole on offshore migrant exploitation premiums
* Reuters: Banking watchdogs ramp up AI scrutiny as stability fears mount
Top Six Features, Deep-dives & Comment of the Day
* Jane Yee for NZ Herald Front Page: ‘Those models are wrong’: Bernard Hickey takes aim at Treasury’s economic forecasts NZ Herald Video: Can New Zealand cut its way to growth?
* Deep-dive by Janika Ter Allen for Stuff: Millennials have taken the biggest hit. But they’re not the only generation losing ground on home ownership
* Column by Brian Easton for Interest: Has the Coalition Government delivered fiscal discipline?
* Investigation by Jared Savage for NZ Herald-$: McSkimming sex scandal ushers in powerful police watchdog to replace IPCA
* Feature by Emily Simpson for 1News: ‘Jacinda was, globally, a target’ – former staffer on the shift from mania to vitriolJacinda Ardern’s former chief press secretary Andrew Campbell’s new memoir is released today.
* Deep-dive for WSJ-$ (gift link): China’s Weakening Economy Is Creating a Lost Generation
Cartoon of the day: No solutions offered. So little attention
Cheers
Bernard
PS: See the full Picks n’ Mixes & In the Papers for today here online only for paying subscribers.
