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Budget 2008 Home Page Budget Policy Statement 2008

Introduction

The economy is experiencing a period of sustained growth – the longest since the early 1970s

We are currently enjoying a sustained period of economic expansion – the longest since the 1970s. The economy is 28% larger since this Government came to office in 1999, and New Zealand’s average growth rate has been faster than that in Australia, the US, the UK, the EU average, and the OECD average.

This performance has led to high labour force participation and the lowest unemployment rate ever recorded in the Household Labour Force Survey. In fact, we have one of the lowest unemployment rates in the OECD. This has made a real difference to the living standards of New Zealanders – average household incomes have increased by more than 25% in real terms under this Government. Fiscally it has reduced the pressure on benefit expenditure, and increased tax revenue.

The Treasury’s updated forecasts indicate that real and nominal GDP growth will be higher over 2007/08 and 2008/09 than was expected at Budget 2007. This is owing to stronger consumption and investment growth with consumers and businesses responding to continued strength in the labour market, as well as the income gains coming from the higher terms of trade.

Overall, the economy’s export performance has proved relatively resilient to the high exchange rate. Since mid-2005 the level of real goods exports has been stable or growing slowly. Looking forward, the Treasury forecasts the level of exports to be higher than at Budget 2007 over most of the forecast period. This reflects in part a world economy which, despite showing some vulnerabilities, is expected to exhibit robust rates of growth.

The higher terms of trade (at a 30-year high), and in particular higher world dairy prices (which have doubled in the past year), have been key drivers of the higher than expected nominal economy.

However, the economy’s strong performance has come with some challenges. Macroeconomic imbalances and long-term expenditure pressures must continue to be addressed. In particular:

  • The current account deficit remains high.
  • Skills shortages and wage pressures have emerged with the strong labour market, and this is contributing to inflation pressures.
  • Some long-term fiscal challenges remain, including the projected long-term rise in health expenditure.

Continued strong fiscal management is needed to ensure these issues are able to be properly addressed.

The Government’s fiscal management has made New Zealand well placed for the long term

The Government’s fiscal strategy continues to focus on strengthening the fiscal position to help manage future spending demands – which means maintaining a fiscal position that is strong and sustainable in the long term. This strategy is implemented through maintenance of a prudent level of debt, and the accumulation of financial assets (primarily in the NZS Fund).

Figure 1 – Fiscal strategy at a glance
Figure 1 – Fiscal strategy at a glance.
Source: The Treasury

Gross sovereign-issued debt (excluding Reserve Bank settlement cash) as a percentage of GDP stood at 18.5% in June 2007, and is forecast to be 15.6% at June 2012. The assets in the NZS Fund are forecast to increase from 7.8% of GDP at 30 June 2007, to 14.6% over the same period. The Crown’s positive net financial asset position (that is, its net debt position adjusted to take account of the assets held in the NZS Fund) is expected to strengthen to 12.4% of GDP (from 4.9%) over the forecast period.

Figure 2 – NZS Fund and Gross Sovereign Issued Debt (excluding Settlement Cash)
Figure 2 - NZS Fund and Gross Sovereign Issued Debt (excluding Settlement Cash).
Source:  The Treasury

Our approach helps prepare New Zealand for future fiscal pressures. This is especially important as we prepare for the challenges of an ageing population. Our approach will also help us to cope with economic shocks – sustaining a low level of debt retains the capacity for us to increase debt when we really need it.

Over the term of this Labour-led Government, at a time when the economy has been running near capacity, fiscal policy has withdrawn resources from the economy in net terms (see Figure 3). This is evidenced by sustained operating and cash surpluses. Indeed, the accumulated cash surpluses as well as contributions to the NZS Fund over the past five years exceed $20 billion.

Figure 3 – The Government is continuing to run a firm fiscal policy stance
Figure 3 – The Government is continuing to run a firm fiscal policy stance.
Source:  The Treasury

We have also been able to begin tackling some long-term challenges, including bold moves towards ensuring the sustainability of decent living standards for New Zealanders in retirement. New Zealand superannuation settings are socially sustainable, providing universal access to a basic retirement income, indexed to the average wage. We have helped to make these settings fiscally sustainable by establishing the NZS Fund to smooth the impact of an ageing population. In addition, we have encouraged personal responsibility for savings to enjoy a higher standard of living in retirement through the State Sector Retirement Savings Scheme and KiwiSaver, including the KiwiSaver enhancements announced in Budget 2007.

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