Economist Tony Alexander warns no matter who wins at the polls those in charge will have to tighten fiscal policy and rein in spending.

Optimism there will be OCR and interest rate cuts next year could be misplaced.

Independent economist Tony Alexander says whichever party is elected in October, it will have to tighten fiscal policy and rein in spending because of a deterioration in the government’s accounts.

Treasury warned in its recent Pre-election Economic and Fiscal Update (prefu) that homeowners and businesses will feel more pain if inflation stays high until the end of next year, and interest rates could be hiked. Mortgage spending will more than double, compared to September 2021.

The government’s published accounts show tax revenue is more than $2 billion behind where Treasury had forecast it to be at the Budget, and slow or near-zero growth is expected to deepen this deficit.

The Reserve Bank recently released its predictions for the economy and inflation, showing this financial year’s predicted deficit was 0.8 per cent, but that has now blown out to 2.3 per cent, Alexander says.

Blunt Warning

On top of that, the International Monetary Fund has issued a blunt warning the country is at risk of falling into a deeper recession than the recent October to March recession it has just climbed out of. It is predicting the country will have the second lowest growth of the 159 countries it monitors – just ahead of Equatorial Guinea.

Finance Minister Grant Robertson has already reacted to the expected deficit by shaving $4 billion off spending and asking government departments to find other efficiencies, which Alexander says, “could have been found five or six years ago as well”.

If agents think they have got some inside word on timing for either tax cuts next year or the year after or spending increases, Alexander says they should pull back on the optimism just a bit because this is something any new government’s going to have to look at addressing after October 14.

He says the deficit blowout could cause a bit of upward pressure on interest rates, although the recent lift in banks’ rates has nothing to do with the domestic economy, rather worries about inflation next year in the United States.

“It is leading to reduced expectations of monetary policy easing there, which has just led to an increase in the medium to long-term fixed interest rates in US markets, which has fed through to New Zealand.”

Volume Of Debt

“One of the factors also pushing up the US wholesale interest rates has been concern about an increased volume of debt being issued by the US Treasury.”

Alexander says there has been a similar factor in place in New Zealand.

“The government’s accounts are deteriorating significantly because businesses are having their profits squeezed by costs going up, but not being able to pass on those cost increases into selling prices as much as they would like to do so tax payments to the government are going down.”