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Budget 2010 Home Page Budget Economic and Fiscal Update 2010

Economic and Fiscal Update

Overview

The New Zealand economy is expected to continue its recovery from recession. After contracting in both the March 2009 and 2010 years, the economy is forecast to grow by around 3% per annum over the next four years. This recovery is expected to flow through to the fiscal position and drive a reduction in operating deficits.

However, the economy has suffered an ongoing loss of output compared to what was expected before the recession and the recovery is expected to be more gradual than previous upturns. With operating deficits remaining over the forecast period, net core Crown debt is expected to rise steadily. Medium-term projections in the Fiscal Strategy Report show the operating balance (before gains and losses) returns to surplus in the June 2016 year.

Uncertainty continues to surround the outlook, particularly the strength of the current recovery and whether imbalances in the economy that built up in the previous expansion will adjust. There are also growing risks associated with recent developments in Europe related to sovereign debt. Some of the key risks to the outlook are explored in alternative scenarios, with stronger or weaker outcomes possible.

Economic Outlook

The economy is expected to experience above-average growth over the next four years as it recovers gradually from recession. The forecast recovery is driven by stimulatory monetary conditions, a stronger global economy, an associated rise in export volumes and prices, and high confidence levels. The economy is also expected to be positively affected by significant tax reform in Budget 2010, including:

  • a reduction in personal income tax rates at existing income thresholds to 10.5%, 17.5%, 30% and 33% from 1 October 2010
  • a rise in GST from 12.5% to 15% on 1 October 2010, and
  • a cut in the tax rate for companies, portfolio investment entities and other savings vehicles from 30% to 28% and base-broadening measures from 1 April 2011.

These changes shift the burden of taxes to sources less harmful for growth. Personal income tax cuts are expected to raise the supply of labour by increasing the economic returns of working. They will also help encourage more saving. For businesses, the tax changes may help reorient investment towards more productive parts of the economy.

The nominal economy is forecast to grow strongly over the next two years as real growth recovers, the terms of trade strengthen and inflation is higher. Consumer price inflation is expected to temporarily spike over the next year as a result of changes in government policy, particularly the rise in GST. The strengthening nominal economy flows through to growing tax revenue, although taxes lag the recovery because of a build-up of corporate losses emanating from the recent recession.

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