Before the election I ran several posts here trying to look at New Zealand’s fiscal position – deficits and debt – by comparison with other advanced countries. The problem with doing so was that the IMF and OECD only come out with their comparable numbers/tables every six months, although the IMF Article IV report released in September did have some updated New Zealand numbers in IMF format.
The IMF Fiscal Monitor came out in early October and I did a quick post the day before the election using those numbers across the full set of advanced economies. Those comparisons, using cyclically-adjusted primary balance estimates, showed New Zealand in a pretty poor light.
The OECD published its latest Economic Outlook a day or two ago, and with it a full database. Nothing much fiscally will have happened in New Zealand between when the IMF and OECD numbers were finalised (the new government’s policy programme released last Friday won’t have been incorporated), so these are probably the last read on fiscal policy and fiscal imbalances based on the Labour government’s policies.
(Unfortunately, the Treasury HYEFU may yet be something of a mixed bag in what it tells us, as it isn’t clear how much of the new government’s policies will have reached a point where estimated effects can be included in the Treasury numbers, which might well being finalised in a week or so from now.)
I downloaded several series. My preference has been to focus on the general government primary balance, as a per cent of GDP, whether headline or cyclically-adjusted numbers (the latter are generally preferred in principle but……a lot turns on output gap estimates).
Here is the headline primary balance series, shown by comparison with that for the median OECD country
We (a) used to run primary surpluses and no longer do, and (b) used to have a more favourable fiscal balance than the median OECD country, but no longer do. Things were heading in that direction even before Covid, and the picture still holds now and (in the projections for the next year or two) now that Covid fiscal pressures are a thing of the past. But….the gap between us and the median OECD country isn’t very large.
Here are the same two series on a cyclically-adjusted basis, where the gap – NZ worse than the median OECD country – is larger (and where the median OECD country has much the same balance as the average of the previous 20 years).
As something of a memo item, here is another fiscal balance measure. Net lending is a measure of the gap between government saving and government investment flows. The picture isn’t too different from the first chart above.
What about debt? The OECD measure is (general government) net financial liabilities
We used to have a lot less net debt than the median OECD country but that gap has closed considerably in the last five years, and on pre-election policies was on track to close quite a bit more in the next couple of years. Note (a point clear in earlier posts) that the median other advanced economy has not increased debt as a per cent of GDP since just prior to Covid. That is a stark difference to New Zealand.
(Incidentally It isn’t true of the OECD wastrel big countries. Here is the feel-better comparison between them and New Zealand
I set out to do this post mostly for completeness, but in doing so it also became clear how different the IMF and OECD numbers are for New Zealand’s cyclically-adjusted deficit measures. I highlighted pre-election that on the IMF’s numbers our cyclically-adjusted primary deficit for 2024 was the third largest in the group of advanced economies. As you can see from the second chart above, the OECD thinks our deficit this year and next, on current policies, will be larger than that of the median OECD country. But we aren’t anything like third worst. perhaps 10th worst (out of 30 or so countries). That isn’t great, but it is rather less headline-grabbing than the IMF numbers had suggested.
What accounts for the difference? Fiscal policy hasn’t changed.
But there are quite different views how much any headline fiscal deficit needs to be adjusted to account simply for the state of the cycle. In other words, the two international agencies have widely divergent views on the output gap (calender year numbers)
Taking last year (2022) as a starting point both the IMF and the Reserve Bank see the New Zealand economy as having been hugely overheated, with positive output gaps of almost 3 per cent of GDP. By contrast, the OECD’s 1 per cent output gap represents only a modest degree of overheating. For this year, the OECD thinks that across the year as a whole there has been no excess demand, whereas the IMF thinks the economy has still been badly overheated (the Reserve Bank is somewhere in the middle, and I’d noted the contrast between their view and the IMF’s in a post a month or so ago).
For next year – all essentially on current policy as the Reserve Bank’s endogenous monetary policy projections don’t have the OCR changing materially – the differences are equally large, but this time the OECD number is between those of the IMF and the Reserve Bank. The IMF reckoned the economy would still on average be moderately overheated next year, while both the Bank and the OECD see a lot of disinflationary pressure.
What is interesting is that the three agencies have almost identical unemployment rate numbers. Last year’s numbers are, of course, already hard, but when the IMF did this year’s numbers it had only the June quarter outcomes, and all the 2024 numbers are simply forecasts (calendar year averages)
If I had to punt, my sense would be that “truth” about excess demand/capacity rests somewhere between the OECD and RBNZ numbers for this year, with a lot more uncertainty about next year. Whatever the correct answer our deficits are projected to be worse than those of the median OECD country – and a lot worse than they used to be – but quite how much worse depends on just how stretched the economy has really been. (If it is still materially overstretched the Crown will be pulling in a lot of revenue that simply won’t be sustained when things normalise).
In one of my pre-election posts, I lamented the fact that Treasury does not provide their own fiscal numbers, and own cyclically-adjusted balance estimates, in a format that allows their numbers for New Zealand to be compared to those the international agencies are producing for other countries. Failure to do so makes timely international comparisons hard, and if at times that suited the politicians, one would hope that Treasury itself had a stronger commitment to enabling effective cross-country comparisons (New Zealand data on its own really only allows comparisons across time in New Zealand, a relevant metric but far from being the only one).
