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Budget 2009 Home Page Budget Economic and Fiscal Update 2009

1 Economic and Fiscal Update

Overview

The world is undergoing its deepest downturn since World War II…

The depth of the current global slowdown and the extent of its synchronisation across countries are unprecedented in the period since World War II. The economic performance of New Zealand's trading partners will play a crucial role in the performance of the New Zealand economy over the next few years. This outlook is highly uncertain, and will be partly dependent on the effectiveness of the numerous large-scale policy responses introduced by governments in response to the financial crisis. A number of the policies undertaken, at least on the current scale, are relatively untested and as such many governments find themselves in uncharted waters.

Uncertainty surrounds how long disruptions in financial markets will continue, as well as the ramifications for world growth. Although not independent, this is complicated by the fact that current adjustments in the world economy are occurring at a time when a number of countries, including New Zealand, have imbalances such as large current account deficits. A number of countries also now face the added complication of significant deteriorations in their fiscal positions and consequential increases in debt. Judgements around such factors have significant impacts on the outlook for an economy. The main forecasts presented here represent the Treasury's view as to the most likely path the New Zealand economy will take over the next several years. Two alternatives are also presented that fall within the range of possible outcomes. Given the considerable uncertainty surrounding forecasts in the current environment, these alternatives represent an integral part of the forecast story.

…with negative implications for the outlook for the New Zealand economy

The weaker outlook for New Zealand's trading partners has resulted in further downward revisions to the forecasts for New Zealand economic activity, with the outlook for the New Zealand economy now weaker than the main track and downside scenario of the December Forecasts. As a result, forecasts of tax revenue are substantially lower, which leads to an increase in the size of forecast fiscal deficits and government debt levels. While some recent data have been less negative, it is too early to tell if this indicates a faster recovery than is incorporated in the main forecasts. An upturn in economic indicators is necessary for quarterly growth to return to positive territory by the end of the year, which is incorporated in the main forecast.

Table 1.1 - Forecast developments over the past year
  2008
Est./Actual
2009 Forecast 2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast

Nominal expenditure GDP ($billion, March year)

           
Budget 2008 Forecasts 178 184 190 199 209 -
Pre-election Forecasts 178 183 189 197 208 218
December Forecasts 178 180 183 191 202 214
Budget 2009 Forecasts 178 179 175 181 189 200

Real production GDP (AAPC, March year)

           
Budget 2008 Forecasts 3.1 1.5 2.3 3.2 3.0 -
Pre-election Forecasts 3.0 0.1 1.8 3.3 3.4 3.1
December Forecasts 3.2 0.3 0.8 2.9 3.9 3.8
Budget 2009 Forecasts 3.1 -0.9 -1.7 1.8 2.9 4.0

Unemployment rate (%, March quarter)

           
Budget 2008 Forecasts 3.5 3.7 4.4 4.5 4.3 -
Pre-election Forecasts 3.7 4.4 5.1 5.1 4.8 4.6
December Forecasts 3.7 4.7 6.4 6.2 5.4 4.6
Budget 2009 Forecasts 3.7 5.0 7.5 7.5 6.3 5.1

OBEGAL [1] (% GDP, June year)

           
Budget 2008 Forecasts 2.9 0.7 0.5 0.2 0.1 -
Pre-election Forecasts 3.1 0.0 -0.9 -1.2 -1.5 -1.5
December Forecasts 3.1 -0.3 -2.2 -3.1 -3.1 -2.9
Budget 2009 Forecasts 3.1 -1.6 -4.4 -5.1 -5.0 -4.2

Gross debt [2] (% GDP, June year)

           
Budget 2008 Forecasts 17.6 17.5 16.8 17.8 16.8 -
Pre-election Forecasts 17.4 17.4 18.0 21.9 23.1 24.3
December Forecasts 17.5 19.2 21.0 26.0 29.4 33.1
Budget 2009 Forecasts 17.5 24.8 29.1 34.2 36.9 38.7

Net debt [3] (% GDP, June year)

           
Budget 2008 Forecasts 6.5 8.1 9.5 10.8 11.9 -
Pre-election Forecasts 5.7 8.9 11.4 14.2 16.7 19.1
December Forecasts 5.7 9.3 13.5 18.5 22.7 26.7
Budget 2009 Forecasts 5.7 8.7 15.6 21.8 27.1 30.9

Notes:

  • [1] Operating balance before gains and losses
  • [2] Gross sovereign-issued debt excluding Reserve Bank settlement cash and Reserve Bank bills
  • [3] Net core Crown debt excluding the NZS Fund and advances
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