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Budget 2011 Home Page Budget Economic and Fiscal Update 2011

1 Economic and Fiscal Outlook


The economy is expected to gather momentum through 2011 and into 2012 and grow by an average of around 3.0% per annum over the next four years, following a subdued recovery so far. This growth in economic activity, together with Budget 2011 decisions to lower operating allowances, is expected to result in the Crown's operating balance returning to surplus (before gains and losses) in 2014/15.

The impact of the tragic earthquake in Canterbury on 22 February 2011 plays a major part in the economic outlook, from the initial disruption to activity through to the rebuilding phase. The fiscal outlook is also affected by the earthquakes, with one-off expenditures contributing to the operating deficit (before gains and losses) increasing to 8.4% of Gross Domestic Product (GDP) in 2010/11. The full impact of the earthquakes is outlined in Chapter 2.

There are some key uncertainties surrounding this outlook. In particular, the impact of the earthquakes and the degree of restraint by households and firms could differ from that outlined in our main forecasts. There are also ongoing uncertainties associated with the global economy that on balance pose downside risks to New Zealand. Some of these risks are explored in alternative scenarios in Chapter 3.

Economic Outlook

The economy has been more subdued than we expected in the Half Year Update, largely reflecting greater caution from households and businesses. Spending was lower and saving was higher as they looked to strengthen their financial positions. There were growing signs the economy was staging a recovery prior to the earthquake on 22 February, but the disruption caused by this disaster has pushed this out. The rebuilding of Canterbury is anticipated to get firmly underway from 2012 and is expected to see economic growth peak at 4.0% in the year to March 2013.

An underlying recovery in growth is also anticipated alongside this rebuilding. Higher farm incomes owing to the current surge in commodity prices are expected to flow through the wider economy, while consumer spending is expected to recover as incomes rise more strongly and household debt ratios return to more comfortable levels. Lower growth in government spending will provide room for private spending and rebuilding activity to increase with less pressure on resources. As a result, monetary policy, while gradually withdrawing current stimulus as the economy moves back onto a stronger growth path, will not need to tighten as much as it otherwise would.

Fiscal Outlook

The gap between core Crown revenue and expenses closes over the forecast period, returning the Crown's operating balance (before gains and losses) to material surplus in the June 2015 year, a year earlier than forecast in the Half Year Update. This is primarily the result of net savings in the current year's Budget package as well as a reduction in the forecast new operating spend in the next two Budgets.

The operating deficit (before gains and losses) in the short term, however, is higher than previously expected, reaching 8.4% of GDP in the current fiscal year. The increased deficit compared with what was forecast in the Half Year Update largely reflects the costs associated with the February earthquake.

Core Crown operating cash flows also reach surplus by the end of the forecast period. When capital spending is included, residual cash deficits are expected to decrease from 7.5% of GDP in the June 2011 year to 1.6% of GDP by the June 2015 year. As a result of these residual cash deficits, net core Crown debt is expected to peak at 29.6% of GDP in the June 2015 year. As outlined in the Fiscal Strategy Report (FSR), net debt is projected to reduce in subsequent years and the Government's long-term fiscal objective is for net debt to be brought back to a level no higher than 20% of GDP by the early 2020s.

Table 1.1 - Summary of the Treasury's economic and fiscal forecasts
Economic (March years, %)            
Economic growth1 -0.7 1.0 1.8 4.0 3.0 2.7
Consumer price inflation2 2.0 4.5 3.1 2.4 2.5 2.6
Unemployment rate3 6.0 6.8 5.7 4.8 4.8 4.6
Fiscal (June years, % of GDP)            
Operating balance4 -3.3 -8.4 -4.7 -1.8 -0.3 0.5
Net debt5 14.1 20.8 26.2 28.5 29.5 29.6
Net worth6 50.2 42.8 37.4 34.5 33.8 34.1


  1. Real production GDP, annual average percentage change
  2. Consumers Price Index (CPI), annual percentage change, 2011 actual
  3. Percent of labour force, March quarter, seasonally adjusted
  4. Total Crown operating balance before gains and losses
  5. Net core Crown debt excluding the New Zealand Superannuation Fund and advances
  6. Total Crown net worth
Sources: Statistics New Zealand, the Treasury
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