The New Zealand Economy: Outlook and
Policy Challenges
Presentation to the Institute of Directors
John Whitehead
Secretary to the Treasury
© The Treasury
NZ recession and recovery
Annual average % change
7
Forecast
6
5
4
3
2
1
0
-1
-2
-3
Mar-97
Mar-99
Budget Update
Mar-01
Mar-03
Mar-05
Mar-07
Mar-09
Mar-11
Mar-13
Higher unemployment
%
11
Forecast
10
9
8
7
6
5
4
3
Mar-99
Mar-01
Main forecast
Mar-03
Mar -05
Mar-07
Mar -09
Mar -11
Mar -13
Budget deficits
% of GDP
Forecast
6
4
2
0
-2
-4
-6
-8
2003
2005
2007
2009
2011
2013
Year ending 30 June
Budget 2009 Forecasts
Trading partner outlook improving
Annual average % change
5
4
3
2
1
0
-1
-2
1999
2001
2003
2005
2007
Actual and Consensus Forecasts
2009
2011
Stronger domestic confidence
Net % of firms
50
40
30
20
10
0
-10
-20
-30
1999
2001
2003
2005
Firms' own activity outlook
2007
2009
Higher New Zealand dollar
Trade Weighted Index (TWI)
80
75
70
65
60
55
50
45
40
1999
2001
Actual
2003
2005
2007
Budget 2009 Forecasts
2009
2011
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
Real GDP (Mar-1990=100)
200
180
160
140
120
100
80
1990
1993
1996
Tradable sector
1999
2002
Non-tradable sector
2005
2008
Looking forward: Twin challenges
Higher
economic
growth
Reduced
vulnerabilities
• Complex inter-linkages between these two
goals.
• But policies to address them are
complementary
NZ’s income gap with Australia
To close the gap we need SIGNIFICANTLY higher growth
Real GDP per capita ($US, 2000 prices)
50,000
Projections
40,000
30,000
20,000
10,000
0
1990 1994 1998 2002 2006 2010 2014 2018 2022
Australia at 1.5% pa
NZ at 1.5% pa
NZ at 3.3% pa
NZ on path of slow decline
GDP per capita (1990 US$000s, PPPs)
35,000
US
30,000
25,000
Australia
20,000
NZ
15,000
Argentina
10,000
Uruguay
5,000
0
1820
1870
1913
1950
1973
1990
1998
2006
Have to make a choice about
where our future lies
GDP per capita (1990 US$000s, PPPs)
20,000
15,000
10,000
5,000
0
1950
1958
1966
South Korea
1974
1982
NZ
1990
1998
2006
To reduce vulnerabilities we need
less reliance on foreign borrowing
% of nominal GDP
-50%
-60%
1989
1993
1997
2001
-70%
-80%
-90%
-100%
-110%
Net international investment position
2005
2009
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
Net debt (% of GDP)
250
200
If government spending
continues on historical
trend
150
100
50
Outcome needed
(2009 Fiscal Strategy)
0
1994 1999 2004 2009 2014 2019 2024 2029 2034 2039 2044 2049
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 New Zealand economy: outlook and
policy challenges
Presentation to the Institute of Directors
John Whitehead
Secretary to the Treasury
© The Treasury