Pre-budget spending spree masks underlying trends

Press, 31 May 1982, Page 12

Pre-budget spending spree masks underlying trends

Consumers have embarked on a pre-budget spending spree to beat the likely imposition of higher indirect taxes and the lingering possibility of a discrete devaluation, according to the May issue of "Business Forecasts," a quarterly economic forecasting service prepared by Business and Economic Research, Ltd, Wellington. Combined with the upturn in the consumers’ expenditure is the continuing, heavy investment in inflation-ad-justed bonds. “Yet household incomes (after tax and other commitments) have not risen sufficiently to permit expansion of both spending and savings. Much of the current spending on durables is thus at the expense of future sales and most of the investment in inflation bonds represents a switch of savings from other forms of savings, e.g. savings bank deposits.” "Business forecasts” envisage an internal deficit for 1981/82 of about $lBOO million as opposed to the $2300 million thought likely six months ago. Growth in Government expenditure will be down in 1982/83 as a result of the 3 per cent

expenditure cut exercise. However, there is the prospect that the net outcome of expenditure cuts, a legislated wage round, limited tax reform and wage-tax trade-off, and a readily financed Government deficit will lead to sharp contraction in the economy. In their February issue, “Business Forecasts” predicted that the wage-tax trade-off would eventually need to be legislated for. This outcome seems much more likely now. They “expect that the Government will move very cautiously on a shift from direct to, indirect taxation.” The balance of payments deficit on current account is forcast to rise from $913 million (provisional) in the year ended June, 1981, to $1570 million in the year ending June,. 1982, and to $1620 million next year. ■ “Business forecasts” see only a slight fall in the rate of inflation in 1982 but a more marked decline beginning in 1983. The number of people registered as unemployed and on special work schemes is expected to remain high and

“may rise as high as 75,000 before the end of the year. At present there is no sign of any significant increase in employment opportunities; this situation is not likely to change markedly this year.”

“Business Forecasts” note that the Government “seems unable to make any sensible reappraisal of its 'think big’ projects which figured so largely in its election campaign. New Zealand needs a public sector investment programme. It thus seems a pity that many worth-while infrastructure and agricultural projects are not being pursued because they do not meet artificially high real discount rates.”

Regarding the international situation. “Business Forecasts” predicts that “the outlook for 1982 is marked slow-down in world growth, although a slow up-turn late in .the year is still expected ... U.S. interest rates should fall later in 1982.”

However, the forecasting team doubt that rates will fall early enough and substantially enough to stimulate an economic upturn in the U.S. economy before 1983.