Analysis: Business nerves and some dubious assumptions
Jacinda Ardern tut-tutted the country’s business sector a few weeks ago.
Frowning ever so slightly, the prime minister suggested firms responding to business sentiment surveys reflected more the political biases of most business owners than they do economic reality.
The economy is doing well, she pointed out: Businesses should cheer up and embrace the fact and ignore the fact they may not have voted for the current incumbents in the Beehive.
Certainly yesterday’s Budget from Finance Minister Grant Robertson shows a set of forecasts which justified the vexation coming from not only Ms Ardern but other ministers.
Those ministers have a point – well, half a point. Even if some of the projections in the Budget tables look a little too relentlessly positive, the economy is in good shape.
This is the core of the confidence problem. Businesses are uncertain about the government's direction and what they do know they are, at best, ambivalent about.
The tilt towards a greater emphasis on social policy is perhaps not as unwelcome amongst business owners as some might think. Businesses employ people, and, especially in New Zealand’s mostly small business environment, are often acutely and personally aware of the country’s social deficits.
That concern will be the nature of that tilt. Much of what was announced in the Budget is involved with what the last Labour Prime Minister Helen Clark used to call “capacity building” – in essence, bulking up the public sector.
Having inherited some very large surpluses and an enviable government balance sheet from National, Labour and its New Zealand First and Green party allies would do well to build on that government’s emphasis on results and outcomes rather than patting itself on the back for how much it is spending.
So business owners – most of them owners of small firms, remember – will be watching just what Ms Ardern’s government actually achieves with the extra spending. That, too, will be a matter of confidence.
More broadly, those business sentiment surveys which so vexed Ms Ardern are important because they are an indication of firms’ willingness to invest and to hire. And that is the key issue. Most economic data is backward looking, and/or based on recent trends continuing.
Some of this has some subtle aspects, one example being the Treasury’s forecast of net migration sliding back to 25,000 a year, simply on the basis that that is what it has always done in the past.
When in doubt, have the graph-line revert to the long-term trend, is one of the unwritten rules of economics.
It seems unlikely to do so, though, in this case. The government’s own infrastructure spending plans will pull in more overseas skills and labour, as will the expansion in the health sector. Anyone who has spent more than 15 minutes in a hospital recently will know the entire system would fall over without migrants. Demand is only going to grow.
The wages bill
That touches on another dubious projection in the budget: the state sector wages bill.
That grew 3% in the 2016 financial year, 3.8% in the 2017 year, and is projected to rise 4.7% for the current year before falling back to a 3% increase in 2019.
Oh, and then throttle back to a sedate 0.8%, 2%, and 0.2% increase in each of the following years.
Those assumptions appear more than just heroic - they are Charge of the Light Brigade suicidal insanity. They did not happen in years former finance minister Bill English was running his ‘zero budgets’ and the idea they are going to happen at a time of an expansionist, state sector-oriented Labour-led government appears as likely as a tsunami in the Sahara.
The Labour party, which these days is pretty much the provisional wing of the teacher and public-sector unions, is never going to be able to keep an annual increase down as low as is projected in these figures – especially at a time of large scale expansion of state sector activity and an already low unemployment rate.
That state sector expansion is going to drive a great deal of the growth over the next few years.
Whether it will be as stellar as the growth being forecast in the budget – above 3%, most of the next few years – is a bit more dubious.
It does depend not just on an expansion of state sector spending but on those firms being prepared to hire and invest.
And they are nervous, less about what was or was not in the budget and more about the effect of employment law changes already under way. The decision to end oil and gas exploration also had an effect – not directly on most businesses, but many have made a note of the way the decision was made.
And its caused a touch of the collywobbles.
While there is little in this budget to add to those collywobbles, neither is there much to settle them down.
NBR's political and economics editor Rob Hosking is on leave for most of this year but has popped back to look at Budget 2018
Realted Video: Post-Budget panel looks at the good, the bad and the indifferent of Budget 2018.
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