Will spending the surplus really boost the economy?

Propping up the lagging economy by spending the surprise surplus might turn out to be a short-sighted move, an economist has warned.

Treasury earlier this week announced a $7.5 billion surplus, far ahead of expectations. With GDP growth recently slowing to 2.1 percent, it's prompted calls for either increased spending or tax cuts.

If Finance Minister Grant Robertson does loosen the purse strings, ANZ chief economist Sharon Zollner says infrastructure would be the best long-term bet.

"There is no question we do have the capacity to spend a little bit more," she told The AM Show on Friday. "Where the debate comes in is how much they should spend, and of course what they should be spending it on."

Of the $7.5 billion only a bit more than half is actually available as cash, with "one-off accounting changes" that don't "do a lot for the economy" responsible for the other half. 

Zollner said the failure of KiwiBuild is evidence the New Zealand economy is, as the IMF and other economists have noted, running at full capacity and will struggle to grow any faster in the foreseeable future. 

"It certainly is true [the Government's] infrastructure plan is more ambitious than we've seen for quite some time and they are struggling to deliver it in a timely fashion, which is not an unusual thing. 

"I think the fact KiwiBuild never got off the ground does illustrate that. You can't really magic up those resources - if your economy is at full capacity, it's very difficult to get things done fast."

Sharon Zollner.
Sharon Zollner. Photo credit: The AM Show

The Opposition has criticised the surplus, suggesting it shows there is room for tax cuts.

"It's an over taxation on the people of New Zealand who, whilst the Government's got more money, are doing it tougher," National leader Simon Bridges told RNZ.

But the surplus doesn't show the economy is better than the stalled GDP figures would suggest, Zollner said, and is unlikely to be repeated.

"Tax revenue is a very lagging indicator - it reflects where the economy was at last year. So the flip side of this upward surprise to the tax take is that really there have been quite a lot of downward surprises for the outlook to the real economy. 

"Treasury is going to have to build that into their forecasts - so that is going to counter this, and tell them they're going to have less income from here on in." 

Labour MP Willie Jackson told The AM Show the money will be "going to go into the kitty", with decisions on what to do with it yet to be made.

"We're going to look at things. We obviously need investment in infrastructure - there's lots of options."

The surplus is reportedly the largest since Labour was last in control of the nation's finances in 2008, under Finance Minister Michael Cullen.