Spending plans boost growth outlook
Higher minimum wages and a new house-building programme will boost economic growth, more than offsetting a sharp fall in immigration, the Reserve Bank says.
Yesterday, the central bank gave its first take on the direction of the new Labour-led Government, which it stressed was preliminary, and said the impact was ‘‘very uncertain’’.
However, acting governor Grant Spencer said the central bank’s initial assessment was that the combination of a new housebuilding programme, a sharp rise in the minimum wage, lower immigration and higher government spending would add about 0.5 per cent to economic growth in each of the next three years.
A fall in gains from immigration was ‘‘a net negative’’ to growth, Spencer said, ‘‘but the overall impact of the new government policies is a positive stimulus to aggregate demand’’.
The Reserve Bank’s assessment was more positive than commentators expected, after Spencer appeared to hint in August that growth was slowing.
But falling investment in construction has now been replaced by an expectation of added ‘‘fiscal stimulus’’, meaning economic growth over the next 18 months is expected to be only marginally weaker than predicted in August.
In forecasts likely to be welcomed in the Beehive, and although the Reserve Bank is predicting slightly higher inflation, the official cash rate – which was left unchanged at 1.75 per cent
– is expected to stay low until 2019.
Lower growth also influences the tax take of the Government, which if cut could force Finance Minister Grant Robertson to choose between promised initiatives,
and posting deficits when he delivers the Budget in May.
The Reserve Bank forecasts do not cover the level of government debt, which Bank of New Zealand head of research Stephen Toplis said may be ‘‘substantially higher’’ than Labour had suggested.
National finance spokesman Steven Joyce called on the new Government to give more detail on its spending plans, as economic forecasting was being affected by the ‘‘lack of clarity’’.
Joyce claimed the speech from the throne at the opening of Parliament contained 51 new spending commitments ‘‘which will put significant pressure on the Government’s spending track and net debt’’.
Cameron Bagrie, chief economist at ANZ, said government spending had taken on added importance in assessing monetary policy.
‘‘It’s clear that fiscal policy will be a lot more expansionary relative to what was flagged in the 2017 Budget.’’
Bagrie, who predicted in recent days that the Reserve Bank would trim its growth forecasts further, added caution.
‘‘We are less upbeat than the Reserve Bank on the growth outlook,’’ he said.