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What could derail Bill English’s surplus

The government this week reiterated its commitment to achieving a surplus by 2014/15, a bid which now has more to do with political rather than economic credibility.

Few economists believe a surplus by that time is possible and, as this newspaper has reported, most also say that from an economic point of view the government could allow the target date to slip a year without causing economic damage.

That last point comes with one large caveat: a major slip could see overseas investors, in particular, those lending money to the New Zealand government, lose confidence in the economic and fiscal strategy.

The Budget Policy Statement, released in March, projects a budget surplus of $370 million for the 2014/15 financial year, down on the pre-election forecast of a surplus of $1.6 billion. In fiscal terms, $370 million is small change and could be thrown out by any of a number of factors. These are uncertain times, economically, and almost any unforseen event could derail the surplus.

Off the track
Some are predictably unpredictable – another eurozone bout of financial lockdown or another massive earthquake somewhere in New Zealand, and all bets are off.

But there are other, perhaps more likely, factors which could also derail the surplus. Starting with KiwiSaver. The quirky thing about this “threat” is that it is the government’s own policy.

National has pledged to try auto-enrolment of KiwiSaver in 2014 – that is, every employee who is not already enrolled in KiwiSaver is to be automatically enrolled in the scheme and then allowed to opt out if they wish.

Leaving the merits or demerits of this sort of “nudge” policy to one side, the cost to the government could be as much as $550 million over four years, depending on how many people stay in the scheme.

Automatic enrolment
At present, everyone who changes jobs, if they are not in KiwiSaver, is automatically enrolled when they start their new job. Most stay in the scheme, with about 37% opting out, according to Treasury figures.

Taking the figure of 63% staying in the scheme as a starting point, and acknowledging that opt out for the government’s auto-enrolment is likely to be higher, the Treasury has modelled two scenarios.

If about 55% of those auto-enrolled stay, it will cost about $550 million over four years and, normally, the bulk of this would be in the first year due to the $1000 kick-start.

That is, in itself, enough to turn a possible surplus in the 2014/15 year into a deficit. Although the estimates are included in the “fiscal risks” at the back of the pre-election economic and fiscal update (Prefu) they are not part of the forecasts for the government accounts in that document.

About 30% of what the Treasury calls “raw” cost pressures comes from personnel costs.

Historically, the state sector wage bill has been the part of government spending financial ministers have had the most difficulty controlling.

The difficulty is not so much the “core state sector” ministers prefer to talk about in public: this part of the public sector only employs bout 37,000 people. The pressures tend to come from the 252,000 people employed in the wider sector, especially in health and education.

It has been relatively easy to curb these costs for a year or two but after that there has almost always been a blowout.

Recent Treasury advice noted total personnel costs rose 2.3% in the year to June 2010 and 3.3% the following year. The budget had been for costs to rise 3% over the entire period.

Climate change policies
The review of the Emissions Trading Scheme (ETS) could cost $585 million between 2013-20, according to estimates in the Prefu.

In the weird, alternative universe of climate change policy, if the government decides to delay bringing agriculture under the ETS until 2018 – as hinted at in a recent discussion document – that would cost a further $100 million a year.

A rise in price for carbon credits also cannot be ruled out: one of the factors which has kept the government costs lower than forecast for the current year is that these have cost less than expected, due simply to lower demand and less interest.

The great unknown is the next stage of the Kyoto Protocol, which is being negotiated now. If there is some form of post-2012 agreement, it could increase the government’s costs and liability in this area.

The question will not only be the fiscal impact of that but what impact any post-2012 deal will have on economic growth: a key question, given that much of Kyoto is aimed, implicitly rather than explicitly, at reducing economic growth.

Economic growth
That brings us to the most important factor of all: economic performance. Slower economic growth over the next two years is likely to be the biggest determinant of all. GDP growth remains below par and the

Treasury’s most recent forecasts – on which the surplus target is based – are in line with that. GDP for the year to March 2012 – not released until June – was forecast to be 1.9%, which is one of the more pessimistic economic forecasts but still below the 2.3% forecast in the Prefu.

The next 12 months is forecast to be 2.8%: broadly in line with private sector forecasts but below the 3.4% forecast before the election. The third year picks up to 3.8%, if the Treasury has it right, an increase on the pre-election figure of 3.3%. It would not take much of a reduction to throw that narrow $370 million figure in black, into a number written in red.

Comments and questions

There are two immediate moves that the govt could make to help our economy,namely-
1Quietly drop the ETS nonsense.
2.Move the entitlement to national super age up to 67.
We look forward to some belated action on these matters?
Willie Getonwithit

Why is auto-enrolment not for ALL in less than 3 months?,incompetence! Surplus by 2014/15,catch Australia by 2025,land man on Mars in 2030..Yeah Right. Keep chasing carrot on stick NZ.