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Budget Policy Statement 2016

Economic and Fiscal Outlook

The New Zealand economy continues to expand. Forecasts in the accompanying Half Year Economic and Fiscal Update show economic growth averaging around 2.7 per cent a year over the next five years (Table 1).

The economy hit an unexpected soft patch, however, in the first half of 2015, when global concerns and falling dairy prices knocked business and consumer confidence. Looking ahead, real Gross Domestic Product (GDP) growth is expected to be weaker over the next two years than was forecast in the Budget Update, although stronger in 2018 and 2019 (Figure 1).

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

This lower-than-expected near-term growth, together with weaker export prices, means the nominal economy (the dollar value of what New Zealand produces) is forecast to be around $17 billion lower over the five years to June 2019 than was expected in the Budget Update (Figure 2). In turn, this flows through to slightly less tax revenue and therefore slightly lower operating balances, compared to forecasts in the Budget Update.

Figure 2 - Changes in nominal GDP since Budget Update
Figure 2 - Changes in nominal GDP since Budget Update.
Source:  The Treasury, Statistics New Zealand
Table 1 - Summary of the Treasury's economic forecasts
March years 2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Real GDP (annual average % change) 3.2 2.1 2.4 3.6 3.0 2.2
Consumers Price Index (annual % change) 0.3 1.4 2.1 1.9 2.1 2.2
Employment growth (annual % change) 3.2 0.3 1.7 2.2 2.2 1.2
Unemployment rate (%, March quarter) 5.8 6.5 6.1 5.3 4.7 4.5
Wage growth (annual % change) 2.1 2.6 1.8 2.2 2.8 3.3
Current account (% of GDP) -3.5 -4.8 -6.0 -4.5 -3.9 -4.3

Source: The Treasury, Statistics New Zealand

The Crown's operating balance (before gains and losses) has recovered from a deficit of $18.4 billion in 2010/11 to a surplus of $414 million in 2014/15. Forecasts show the operating balance broadly in balance over the next few years, before rising rapidly in 2018/19 (Figure 3).

Figure 3 - Operating balance (before gains and losses)
Figure 3 - Operating balance (before gains and losses)   .
Source:  The Treasury

Net core Crown debt is forecast to peak at 27.7 per cent of GDP in 2016/17 and falls below 20 per cent of GDP in 2021/22 - one year later than expected in the Budget Update (Figure 4). Core Crown expenses are forecast to remain around 30 per cent of GDP over the next two years before falling below 30 per cent from 2017/18. Contributions to the New Zealand Superannuation Fund (NZS Fund) are projected to resume in 2022/23.

Figure 4 - Net core Crown debt
Figure 4 - Net core Crown debt   .
Source:  The Treasury

Inflationary pressures remain weak, and interest rates and exchange rates are expected to be lower than forecast in the Budget Update. At the Budget Update, fiscal policy was considered to be slightly contractionary on average over the forecast period, but is now expected to be a little more supportive of economic activity.

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