New Zealand finishes the fiscal journey

The New Zealand Treasury staff is expected to revise down their economic assumptions materially in this week's Half Year Update, given that the forecasts in May were so upbeat, and with growth having clearly slipped a gear through this year. Those downgrades were realized, with GDP growth now forecast to average in the low 2%s over the next couple of years, rather than near 3%. The changes to the unemployment forecasts, which previously followed a straight path lower, were even more material.

But did not expect the economic downgrades to cascade through to much change in the fiscal tracking, and for the most part they didn't. Even as the economy has drifted to a softer growth pace, revenue performance repeatedly has come in above forecast, and in October, the final Budget outcome for 2014/15 printed a slight surplus, the first since 2008. 

The healthier tone of the fiscal accounts, relative to other metrics, reflects the fact that New Zealand's growth performance has not been weak in absolute terms, but only in the sense that it has underperformed relative to supply growth (particularly immigration), and so has struggled to close the output gap, lower unemployment, and raise inflation, factors of most relevance for monetary policy. Consumption and employment growth, to which the tax base is levered, by contrast, have held up well.