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Budget 2007 Home Page Budget Economic and Fiscal Update [2007]

Real GDP Growth Forecast to Return to Trend by 2010 and 2011

A reorientation of growth towards exports intensifies over the March 2010 year following depreciation of the exchange rate …

Export growth is expected to accelerate during the March 2010 year as services exports in particular show strong growth on the back of the lagged effect of the depreciation of the exchange rate. Import growth is expected to slow further in 2010 owing to continued weak domestic demand growth and the impact of the exchange rate on import prices, before exhibiting a modest increase to 1.6% in the year to March 2011 as market investment growth increases. This means that exports make a strong contribution to growth and also contribute, together with the decline in import volume growth, to the annual current account deficit being forecast to decline to a little over 6% of GDP by the end of the forecast period.

Figure 1.19 – Current account

Sources: Statistics New Zealand, The Treasury

The lower exchange rate also boosts the competitiveness of New Zealand exports, with export volume growth increasing 3.5% in the year to March 2009. The exchange rate impact on services exports is expected to show up progressively over the March 2010 year when services export volumes grow 5.4% taking total export growth to 4.1%.

Market investment is forecast to gradually pick up in 2010 owing the improved performance of exports, lower interest rates and some increases flowing from the Business Tax Reform.

… contributing to a smaller current account deficit

A high level of the terms of trade during 2008 is forecast to lift the goods balance in the current account, while the eventual reorientation of growth towards exports also drives a closing of the current account deficit. The investment income balance is expected to remain in deficit. However, the investment income deficit is forecast to become smaller as the weak outlook for growth in 2009 hits firms’ profits, while the return on New Zealand investments abroad is expected to rise slightly.

Economy-wide labour productivity is forecast to increase relative to the past couple of years, contributing to trend growth of around 3%

Table 1.3 – Productivity growth
March Years GDP Growth Labour Productivity Growth Labour Input Growth
Average 1997-2006 3.0 1.2 1.8
2005 3.9 0.5 3.4
2006 2.0 -0.1 2.2
2007 1.7 0.8 0.8
2008 2.6 1.8 0.8
2009 1.6 0.9 0.8
2010 2.8 2.2 0.6
2011 3.1 1.7 1.4
Average 2007-2011 2.4 1.5 0.9
Sources: Statistics New Zealand, The Treasury

Economy-wide labour productivity growth, as measured by economy-wide GDP per hour worked, has been low recently, falling 0.1% in the year to March 2006 before increasing to 0.7% in the year to December 2006. The GDP forecasts discussed in this chapter incorporate labour productivity growth that is generally higher than the rates that have prevailed over the past three years. We believe that the recent weak productivity growth has included a large cyclical component.

The following factors suggest that productivity growth is likely to lift over the forecast period:

  • Despite slowing growth, labour market conditions have remained tight with firms still facing difficulties in finding labour. In such an environment firms are reluctant to reduce employment unless it is absolutely necessary. This is likely to have contributed to the lower labour productivity experienced recently, but potentially enables increases in production in the future without the need for a commensurate increase in labour input.
  • Productivity growth may also be higher over the forecast period as returns from recent growth in business investment are realised.
  • In recent years a number of new workers have been drawn into employment. It is likely that these new workers have been less productive than experienced workers. However, as these workers spend time in employment, developing on-the-job skills and experience, it is likely that their productivity will increase.
  • The reorientation of growth towards the export sector, where firms tends to have a higher level of productivity, should boost average productivity.

Annual growth in tax revenue is expected to be around 5%

Tax revenue is forecast to grow by around 5% in each of the 2010 and 2011 June years. The two largest tax types, source deductions and GST, are responsible for the vast bulk of this growth, growing by around 6% and 4% respectively. With changes such as the Business Tax Reform bedded down by 2010, growth in corporate tax is forecast to resume, growing by 4.5% to 5% in each of 2010 and 2011.

Impact of KiwiSaver Enhancements and the Business Tax Reform

The 2007 Budget Update incorporates a number of policy changes. The KiwiSaver enhancements and Business Tax Reform have both been incorporated into the economic forecasts.

The reduction in the corporate tax rate to 30% will increase the return on investment. In the forecasts this has the effect of making a larger number of investment projects profitable, and adds to the growth rate of market investment. The forecasts incorporate around $300 million of additional real investment as a result. The lift in investment is not expected to be immediate and is spread from 2009 until the end of the forecast period. Around 50% of investment is sourced from imports, so the lift in investment sees import volumes increase by around $150 million.

The main effects of the KiwiSaver enhancements are likely to be on household saving. However, there may be some impact on private consumption as some individuals may be able to switch from their current saving vehicle to saving through KiwiSaver and reduce their saving by the size of the tax credit, but still accumulate the same level of funds. The exact size of this impact is uncertain. Our estimate is that enhancements to KiwiSaver will lift nominal private consumption by around 10% of the cost of the enhancements (in turn, household saving increases by 90% of the cost), but the effect could be between -10% and 25%.

There may also be some effects on firms. The cost of the compulsory matching of employee contributions could affect firm profitability, particularly as the contributions increase beyond the level of the tax credit provided to employers. As a result, it is likely that employers will seek to recoup this additional cost through lowering future wage growth or through increasing prices. These possible effects have not been incorporated in the forecasts, in part because they will be heavily influenced by the state of the economy at the time, but also because the main effects are likely to occur towards the end of the forecast period.

The estimate that the programme will lead to a 10% increase in consumption is the key determinant of the effects of the enhancements to KiwiSaver on the rest of the economy. With the spillover from the KiwiSaver enhancements into private consumption spending expected to be small, the programme as a whole has only a limited effect on real economic activity. Nominal consumption is expected to rise by around $30 million in the March 2008 year, with the impact rising to around $120 million by March 2011 (the end of the forecast period). This sees domestic demand lift, rising by approximately $300 million in total across the forecast period and this is forecast to lead to slightly higher inflation and interest rates.

The programme is expected to lead to an increase in annual pension fund contributions of $1.3 billion by the end of the forecast period. The table below summarises the effect of KiwiSaver on a number of economic variables:

(June years) 2008 2009 2010 2011
Fiscal cost of enhancements ($ millions)[5] $303 $693 $1,006 $1,214
Household saving effect ($ millions) +$273 +$624 +$905 +$1,093
Real GDP +$20 +$42 +$53 +$68
Inflation 0 +0.02 +0.03 +0.02
Interest rates (percentage points) 0 +0.05 +0.05 +0.01


  • [5]Note that this includes the full cost of the fee subsidy for all KiwiSaver members ($40) as the size of the subsidy has only recently been determined.

Fiscal Forecasts – Finalisation Dates and Key Assumptions

Finalisation Dates
Economic outlook (refer Chapter 1) 16 April
Tax revenue forecasts 20 April
Fiscal forecasts 9 May
Government decisions and circumstances 9 May
Actual asset revaluations 28 February
Foreign exchange rates 28 February
Specific fiscal risks (refer Chapter 4) 9 May
Contingent liabilities and commitments (refer Chapter 4) 31 March

Key Assumptions

The fiscal forecasts have been prepared in accordance with the Public Finance Act 1989. They are based on the Crown’s accounting policies and assumptions (refer page 158 of the GAAP Series Tables). As with all assumptions, there is a degree of uncertainty surrounding them. This uncertainty increases as the forecast horizon extends. A summary of the key economic assumptions that are particularly relevant to the fiscal forecasts is provided below (on a June-year-end basis to align with the Crown’s balance date of 30 June):

June years 2006/07 2007/08 2008/09 2009/10 2010/11
Real GDP (P) (ann avg % chg) 2.0 2.1 2.3 1.8 3.0 3.2
Nominal GDP (E) ($m) 162,667 164,868 173,187 179,132 186,985 196,177
CPI (annual avg % change) 2.7 2.7 2.4 2.4 2.3 2.1
Govt 10-year bonds (ann avg %) 5.9 5.8 6.1 6.1 6.1 6.0
90-day bill rate (ann avg %) 7.5 7.7 7.9 6.8 6.4 6.2
Unemployment rate ((HLFS) basis ann avg %) 4.0 3.8 3.9 4.4 4.5 4.3
Full-time equivalent employment (ann avg % change) 0.9 0.8 1.6 0.9 0.8 1.4
Current account (% of GDP) -9.3 -8.3 -7.2 -6.9 -6.8 -6.1

Source: The Treasury

New Zealand Superannuation (NZS) Fund

The contribution to the NZS Fund for the year ending 30 June 2007 is $2.049 billion. The contribution to the NZS Fund is calculated over a 40-year rolling horizon to ensure that superannuation entitlements over the next 40 years can be met if the contribution rate were to be held constant at that level. The Government is making the required minimum annual contribution for 2006/07 and 2007/08 as calculated by the formula set out in the NZS Act.

$billion (June year end) 2005 2006 2007 2008 2009 2010 2011
Required contribution 2.107 2.337 2.049 2.103 2.194 2.312 2.458
Actual/Budgeted contribution 2.107 2.337 2.049 2.103 2.194 2.312 2.458

Source: The Treasury

The underlying assumptions in calculating the contributions for 2007 are the nominal gross domestic product (GDP) series to 2047, the NZS expense series to 2047 and the expected long-term, net after-tax annual return of the NZS Fund (6.1%) (6.1% Half Year Update). The forecast rate of return is based on the Treasury’s assumptions for the rate of return on financial portfolios of Crown financial institutions. The Treasury website contains further information on the NZS Fund, as well as a copy of the NZS Fund model.

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