The New Zealand Government has announced in its Budget statement for the last two years that it expects to balance its books by 2014. This seems increasingly unlikely. Like a sunny weather forecast that is corrected as the storm approaches, the Government has been revising its numbers as 2014 approaches. Last year the Government spent nearly 1/3 more than it took in revenue. This year it is projecting still to spend more than 20% more than it takes in revenue and the numbers are still getting worse.
The main problem with the Government's financial outlook is that it is dependent on economic growth. Last year the Minister of Finance was saying GDP growth would reach around 4% by 2014. This seems increasingly optimistic. Our current GDP growth is around 1% and even that is dependent on the highest commodity prices New Zealand has ever experienced. Commodity prices are starting to decline and the trend is likely to accelerate. Add to this the fact that Europe and the United States are still in the grips of economic stagnation in spite of a very tentative recovery in consumer spending and jobs and you have a very risky economic scenario for New Zealand.
The Government has proclaimed that it expects the Christchurch earthquake to add 1.25% to economic growth every year from 2012 to 2016, which is based on a economic misunserstanding known as the broken window fallacy. Rebuilding Christchurch only diverts investment from other potentially more productive areas of the economy and adds costs to everyone (look at the rise in your insurance premiums this year, if you don't believe me).
I am normally an optimistic person but I am more pessimistic about New Zealand's immediate economic prospects than I have been since the late 1980s. If everything goes our way, we may have a modest economic recovery over the next few years, but it won't see the 4% economic growth by 2014 the Government hopes for. And if the world economy does not recover strongly and if commodity prices continue to fall, we will see a significant worsening of our terms of trade with a consequential negative impact on every area of our economy.
New Zealanders need to prepare for very tough economic times ahead.