Treasury downplays expectations

Treasury has delivered a thinly veiled warning to politicians not to ratchet up election year expectations on the back of a surging economy.

Finance Minister Bill English also signalled yesterday that with the recovery under way, expectations should be shifting away from government spending to pay rises – and said workers would feel entitled to better than zero pay increases after several years of pain.

New Zealand has been labelled a rock star economy internationally on the back of a growth rate forecast to be among the highest in the developed world.

Treasury’s chief economist Girol Karacaoglu is cautioning, however, that the recovery could look more like a one hit wonder if the brakes come off government spending.

‘‘It’s no secret that New Zealand is in an enviable position.....rock star economy seems to be the phrase on everyone’s lips. That makes great headlines but it only really reflects our short term outlook.’’

Some of the risks identified in Treasury’s December update had already begun to materialise, including stronger domestic demand, and the global environment continued to be volatile, Karacaoglu said.

‘‘We need to learn the lessons of the last decade [and] show restraint as the economy hits a new gear.’’

A spike in Government spending risked driving interest rates up higher than they would be otherwise and this would put more pressure on the exchange rate, undermining exporters.

Karacaoglu’s warning comes as politicians start rolling out their election year promises, including Labour’s $500 million plan for a baby bonus and a boost to early childhood education. National has also rolled out new spending promises, including a $369m boost to teaching.

Announcing the budget date of May 15 yesterday, English said the focus had now shifted from managing a recession to managing a growing economy.

‘‘We want to avoid the mistakes of the mid-2000s when in a growing economy government spending took off, housing prices took off again and we ended up pushing ourselves into recession.’’

But he acknowledged that people were looking to share in the benefits of growth – including through pay rises.

‘‘I think a lot of households will be looking for benefits through more job security, which they haven’t had and through pay rises, which households haven’t had much of through the last three or four years.’’

Many workers had given away overtime, or taken pay cuts during the recession, and there would be an expectation ‘‘particularly for those people with skills that are in demand that they will be doing better than zero pay increases’’.

A survey by recruitment firm Hudson NZ suggested nearly six out of 10 employees were seeking new roles with better pay a top reason for moving.

English said workers could see the signs that the economy was on the up.

‘‘I think businesses are going to find that as they need to retain skilled people and be attractive places to work then increased pay is going to be part of that package.’’

English said his sixth budget would be ‘‘predictable’’ and the Government would have to keep a lid on spending to avoid putting pressure on interest rates.

Fairfax Media