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20 Nov 2017

Will Government Plans Slow the Economy

The new Labour-led Government continue to make significant changes across a number of policy areas, many of which will have an uncertain impact on the New Zealand economy. While higher minimum wages and new house building programs are likely to stimulate growth over coming months, tighter immigration policy could have a negative impact on GDP and employment growth. As economists wait for more detail on key policies, the Reserve Bank's initial assessment of economic changes was more positive than many people expected.

According to the RBNZ, new government spending programs are likely to boost the New Zealand economy over the next few years. While Grant Spencer, acting governor of the central bank, stressed the uncertain impact of certain changes, higher government spending is likely to add around 0.5 percent to economic growth in each of the next three years. The bank's initial positive assessment was based on the combination of a new house building program to increase stock by 100,000, an increase to the minimum wage, lower immigration figures, and higher government spending. The official cash rate, which was recently left unchanged at 1.75 percent, is expected to stay low until 2019.

Government consumption is expected to be about 3 percent higher than forecast in the May Budget, adding around 0.5 percent to economic growth. According to the RBNZ, however, this could mean that households end up spending less: "Increases in government consumption could be partly offset by a decline in household consumption if households assume increased government expenditure will necessitate higher taxes in the future." A similar situation exists regarding the KiwiBuild program, with government spending likely to reduce activity in the private sector. Despite the new KiwiBuild visa proposal, there may not be enough people to build 10,000 homes per year from 2020: "[O]ur working assumption is that around half of the proposed increase will be offset by a reduction in private sector activity." said the Reserve Bank.

New spending initiatives include higher minimum wages, which are set to increase to $20 per hour by 2021. The Reserve Bank are "uncertain how businesses will respond" to the rise, with increases possibly spilling over and slowing overall employment growth: "The lift in minimum wage may spill over to workers in higher wage brackets, and could impact on businesses' labour demand and hiring intentions." Higher minimum wages could also encourage people who are not working to start looking for employment, something that would have a positive effect on welfare figures while stretching labour force participation numbers that are already at a record high.

New government plans to reduce immigration in New Zealand could have the biggest negative impact on growth, with numbers set to drop to 30,000 per year compared to former ABS predictions of 50,000 in 2019. According to ASB chief economist Nick Tuffley, "So that does mean slower population growth, slower overall GDP growth and probably slower employment growth... And also slightly lower tax revenues because the revenue base won't be quite so big." There are positives to this equation, however, with fewer people coming into Auckland improving the housing deficit problem and giving more opportunities to first-home buyers.


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