© 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

2013

Year 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