© The Treasury
The New Zealand Economy: Outlook and Policy Challenges
Presentation to the Institute of Directors
John WhiteheadSecretary to the Treasury
NZ recession and recovery
-3
-2
-1
0
1
2
3
4
5
6
7
Mar-97 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13
Budget Update
Annual average % change
Forecast
Higher unemployment
Main forecast
3
4
5
6
7
8
9
10
11
Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13
%
Forecast
Budget 2009 Forecasts
2013Year ending 30 June
-8
-6
-4
-2
0
2
4
6% of GDP
2003 2005 2007 2009 2011
Forecast
Budget deficits
Trading partner outlook improving
-2
-1
0
1
2
3
4
5
1999 2001 2003 2005 2007 2009 2011
Actual and Consensus Forecasts
Annual average % change
Stronger domestic confidence
-30
-20
-10
0
10
20
30
40
50
1999 2001 2003 2005 2007 2009
Firms' own activity outlook
Net % of firms
Higher New Zealand dollar
40
45
50
55
60
65
70
75
80
1999 2001 2003 2005 2007 2009 2011
Actual Budget 2009 Forecasts
Trade Weighted Index (TWI)
Implications of recent data
• Good news:– The worst of the global recession is over– Signs of modest recovery in NZ
• Bad news:– Housing market strength and stronger NZ
dollar suggest an unbalanced recovery (too much domestic demand, strong dollar, not enough exports)
NZ needs a switch in output towards the tradable sector
80
100
120
140
160
180
200
1990 1993 1996 1999 2002 2005 2008
Tradable sector Non-tradable sector
Real GDP (Mar-1990=100)
Looking forward: Twin challenges
• Complex inter-linkages between these two goals.
• But policies to address them are complementary
Higher economic growth
Reduced vulnerabilities
NZ’s income gap with AustraliaTo close the gap we need SIGNIFICANTLY higher growth
0
10,000
20,000
30,000
40,000
50,000
1990 1994 1998 2002 2006 2010 2014 2018 2022
Australia at 1.5% pa NZ at 1.5% pa NZ at 3.3% pa
Real GDP per capita ($US, 2000 prices)
Projections
NZ on path of slow decline
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1820 1870 1913 1950 1973 1990 1998 2006
GDP per capita (1990 US$000s, PPPs)
Australia
NZ
US
Argentina
Uruguay
Have to make a choice about where our future lies
0
5,000
10,000
15,000
20,000
1950 1958 1966 1974 1982 1990 1998 2006South Korea NZ
GDP per capita (1990 US$000s, PPPs)
To reduce vulnerabilities we need less reliance on foreign borrowing
-110%
-100%
-90%
-80%
-70%
-60%
-50%
1989 1993 1997 2001 2005 2009
Net international investment position
% of nominal GDP
Bold policies to help rebalance the economy
• Tax mix:– Higher GST, land tax, capital gains tax. Lower
income taxes (but which ones?). • Monetary-Fiscal policy mix:
– Slower growth in government spending would allow RBNZ to keep interest rates low for longer
• Structural policy reform that encourages resource shifting
Tough decisions
0
50
100
150
200
250
1994 1999 2004 2009 2014 2019 2024 2029 2034 2039 2044 2049
Net debt (% of GDP)
If government spending continues on historical trend
Outcome needed(2009 Fiscal Strategy)
Barriers to reform
• Not enough focus on the magnitude of the challenges we face
• Too much focus on short-term pain of reform
There is an urgent need to shift the focus and make clear the choices we face
Summary
• The economy is picking up but the recovery looks “unbalanced”
• NZ needs a comprehensive strategy for significantly lifting our future prosperity
• This will require bold policies that bring together tax reform and structural policy reform and permit a policy mix of tighter fiscal policy and looser monetary policy
• Business leaders have an important role to play in framing the policy debate
© The Treasury
The New Zealand economy: outlook and policy challenges
Presentation to the Institute of Directors
John WhiteheadSecretary to the Treasury
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