Don’t rely on the current government for growth

If you believe the current economic commentary in New Zealand; then the general consensus is that we are in the midst of an economy in a slowdown phase. The ANZ Business Outlook survey highlighted that residential construction intentions had plummeted (-27.3% drop). A fall in residential investment of that magnitude is suggesting the potential to knock a full percent off GDP growth.

When looking offshore, governments have been prepared to commit to large quantities of fiscal stimulus in an attempt to stimulate growth and activity, quantitative easing or legislated growth for want of a better term. The theory being, government steps in to support the economy as it slows and help fend off the potential for a recession. However, in a New Zealand context, don’t rely on the current government for growth.

Amidst the wellbeing budget, the finance minister announced they were reducing net debt to 20 percent of gross domestic product by 2022 and looking at a range of 15-25 percent of GDP, based on advice from the Treasury. Essentially the status quo, and hardly represents moving the dial in terms of government spending.

The government has acknowledged the ‘gap’ in large scale infrastructure in NZ but has done little other than announce a regional infrastructure budget with no clarity on what they are going to execute on and how it has going to be implemented. They openly admit, government lack the resources and skills to deliver such projects and that there is a need to partner with the private sector. The question then is, why the government doesn’t utilise their balance sheet whilst funding is cheap and involve offshore counterparties in a competitive process? This will not only create jobs and support growth but help deliver long life legacy infrastructure assets.

There is no doubt that the current government has inherited a sound balance sheet but there appears to be a real reluctance to utilise it. The recent announcement of the targeted debt range felt prudent but uninspiring and hardly growth oriented. In fact, it left you feeling that it is highly unlikely much will happen before the next election cycle, and to my mind this represents an opportunity missed.

A lot has been written about the Reserve Bank and the role they have to play in managing the economy through the next stage of the economic cycle. My fear, is that the RBNZ are going to be forced to act as the fiscal response will ultimately be slow, with a chance of being non-existent.