Short term gain, long term pain? Impact of New Zealand’s fiscal stimulus - A dynamic general equilibrium analysis

The fiscal stimulus of almost $10b over four years will result in an extra 10,000 jobs in the short run, but it will reduce future consumption by $160 per person per year. We can spend now, but we have to pay for it eventually. The Government faces a real juggling act in its forthcoming Budget between short and long term objectives. Its expenses are now exceeding tax revenues; according to the Budget Policy Statement 2009 operating deficit is forecast to reach 3% of GDP over the next years and debt will rise possibly to 57% of GDP in 2023 in the absence of policy changes (Treasury 2008c). To repay debt and balance its budget, the Government may need to do more than forego its planned tax cuts. Taking into account also the future superannuation and health cost pressures, we think that its medium term position implies the need to consider a combination of public spending cuts and productivity improvements, tax reforms, and asset sales. We find that a policy that reduces the cost of employing people could boost employment more at a similar cost to long-run consumption. Better still would be well-targeted spending on infrastructure to deliver long run productivity improvements. Given New Zealands longer term growth challenge, any fiscal efforts to stabilise the economy and avoid a more severe recession should have productivity at the centre of the policy radar screen.