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Budget 2015 Home Page Fiscal Strategy Report - Budget 2015

Economic Context

The outlook for the economy remains positive, with growth of 2.8 per cent on average over the next four years (Figure 1).

Figure 1 - Real GDP growth
Figure 1 - Real GDP growth   .
Sources:  Statistics New Zealand, The Treasury

Employment and wages are both forecast to rise, and record high labour force participation is boosting the productive capacity of the economy.

New Zealand's relatively strong economic performance compared to other countries is demonstrated by continued high levels of net inwards migration and the strong New Zealand dollar.

The economic outlook is not without risks, however. There is a chance that dairy prices and nominal GDP growth may not recover as expected, and global uncertainties remain.

Figure 2 - CPI inflation
Figure 2 - CPI inflation   .
Sources: Statistics New Zealand, The Treasury

Annual CPI inflation is currently 0.1 per cent - well below the Reserve Bank's 2 per cent target - and inflation forecasts have dropped significantly (Figure 2).

Low inflation, assisted by the Government's fiscal restraint, will help maintain strong real wage growth and keep interest rates lower for longer. Upward pressure on interest rates expected in the last Budget has fallen away considerably.

However, policy easing overseas, together with a relatively strong New Zealand outlook, is keeping upward pressure on the exchange rate.

While New Zealand's economy continues to grow solidly in real terms, the growth in nominal GDP (the dollar value of what is produced each year) is expected to be more muted and less than previously forecast in the Budget Economic and Fiscal Update 2014 (BEFU 2014). This is due primarily to a weaker outlook for export prices - particularly dairy prices - and lower-than-expected inflation.

Figure 3 - Contributions to changes in nominal GDP from BEFU 2014
Figure 3 - Contributions to changes in nominal GDP from BEFU 2014.
Sources: Statistics New Zealand, The Treasury

As a result, New Zealand's nominal economy is expected to be about $15 billion lower this year and over the next three years than was forecast in last year's Budget (Figure 3).

This has a direct impact on tax revenue but not on most of the Government's expenditure which, outside of indexed benefits, is mainly fixed in dollar terms. As a consequence, future surpluses are lower than previously forecast, although the positive direction of change remains unaffected.

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