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Budget 2016 Home Page Budget Economic and Fiscal Update 2016

Executive Summary

  • Economic growth is forecast to strengthen from 2.6% in the year ending June 2016 (the 2015/16 fiscal year) to 3.2% in the year ending June 2018 driven by strong population growth, sustained increases in services exports, particularly tourism, and the stimulatory effects of low interest rates.
  • The operating balance before gains and losses (OBEGAL) is expected to increase from a position of broad balance in the current year to a surplus of $6.7 billion (2.2% of gross domestic product (GDP)) in the 2019/20 fiscal year (Figure 1).
  • As a share of GDP, net core Crown debt is forecast to peak at 25.6% ($66.3 billion) in the 2016/17 fiscal year and to decline to 20.8% ($62.3 billion) in the 2019/20 year (Figure 1).
Figure 1 - Operating balance and net debt
Figure 1 - Operating balance and net debt .
Source: Statistics New Zealand, the Treasury

In New Zealand, the pace of growth picked up in the second half of 2015 and was stronger than anticipated in the Half Year Update. This strength is reflected in upward revisions to the Treasury's forecasts of nominal GDP, tax revenue and OBEGAL in the current fiscal year. These gains are sustained across the forecast period by ongoing strength in net migration inflows, construction activity and spending by visitors to New Zealand.

Growth among New Zealand's major trading partners eased in 2015, particularly in China and other Asian economies. Global monetary policy remains extremely accommodating and a modest pick-up in trading partner growth is expected in 2017 and subsequent years.

Risks of more pronounced weakness in the global economy remain high, with China's transition towards greater consumption-driven growth and the impacts of reduced monetary policy stimulus in the United States (US) potential sources of further volatility. Other risks, including the United Kingdom's (UK's) European Union membership referendum, are adding to uncertainty.

The New Zealand economy is continuing to adjust to the effects of lower commodity prices, particularly for dairy exports. Commodity export values are forecast to weaken over the year ahead leading to a wider current account deficit. International dairy prices are expected to recover gradually over 2017 and 2018, contributing to a narrowing of the current account deficit.

Compared with the Half Year Update, net migration inflows are significantly higher over the forecast period, which raises the Treasury's estimate of the economy's productive capacity (or potential output), and flows through to higher real GDP. However, a larger proportion of growth is expected to occur in the relatively low productivity sectors of construction and hospitality. Consequently, growth in real GDP per capita is slightly slower than forecast in the Half Year Update.

Consumers Price Index (CPI) inflation is expected to rise to 2.0%, the middle of the Reserve Bank's 1% to 3% target range, in late 2017. This is around one year later than in the Half Year Update, reflecting the effects of recent falls in fuel prices and the impact of lower inflation expectations on wage- and price-setting behaviour.

Compared to the Half Year Update, the lower inflation forecast reduces growth in nominal GDP and tax revenue in the 2017/18 and 2018/19 fiscal years. Nevertheless, the strength of recent outturns underpins nominal GDP and tax revenue forecasts that remain higher than in the Half Year Update (Figure 2).

Figure 2 - Nominal GDP (annual)
Figure 2 - Nominal GDP (annual) .
Source: Statistics New Zealand, the Treasury

The number of people in employment increased by 120,000 in the past two years, broadly matching growth in the labour force. However, the proportion of the working-age population in the labour force has been variable and the unemployment rate has fluctuated between 6.0% and 5.4% over the past two years.

Employment is forecast to grow around 2.0% per annum over the next four years and, as net migration inflows ease, to exceed growth in the labour force. The unemployment rate is expected to remain within its recent range (6.0% to 5.4%) until mid-2017, before steadily declining to 4.6% at the end of the forecast period.

Budget 2016 incorporates an increase in the Government's 2016/17 operating and capital allowances and lower future allowances. The net effect of the Government's revenue and expenditure decisions (the fiscal impulse) is to provide modest support for economic growth over the 2015/16 and 2016/17 fiscal years. Thereafter, the combination of stable operating allowances and increasing tax revenues generates a mildly contractionary fiscal impulse.

Although OBEGAL is expected to record small surpluses this year and in 2016/17, increases in capital spending lead to larger core Crown cash deficits (residual cash) and higher net debt. Residual cash returns to surplus in 2018/19 and net debt declines. Overall, the outlook for residual cash flows has improved since the Half Year Update, and net debt is forecast to be $8.8 billion lower in 2019/20.

Net worth attributable to the Crown is expected to increase over the forecast period, driven by OBEGAL surpluses.

The economic and fiscal forecasts are based on a number of assumptions and judgements concerning economic developments. The Risks and Scenarios chapter presents two scenarios to show how the economy might evolve under some alternative judgements. The weaker world scenario is assumed to reduce visitor arrivals and to lower the terms of trade, which results in weaker growth. OBEGAL remains close to balance until the 2017/18 year before increasing, and net debt is around four percentage points higher in 2019/20 than in the main forecast. In the sustained domestic momentum scenario, stronger GDP growth and higher inflation flow through to increases in nominal GDP and tax revenue. OBEGAL increases to almost 3.0% of GDP in 2019/20 and net debt is well below 20.0% of GDP.

Table 1 - Summary of the Treasury's main economic and fiscal forecasts
June years (%) 2015
Real GDP growth1 3.3 2.6 2.9 3.2 2.8 2.5
Unemployment rate2 5.9 5.6 5.6 5.1 4.6 4.6
CPI inflation3 0.4 0.1 1.5 2.0 1.9 2.1
Current account balance4 -3.5 -3.5 -4.6 -4.1 -4.3 -4.8
Fiscal (% of GDP)            
Total Crown OBEGAL5 0.2 0.3 0.3 0.9 1.7 2.2
Net core Crown debt6 25.1 24.9 25.6 25.0 23.1 20.8
Net worth attributable to the Crown 35.8 33.4 33.4 33.5 34.5 36.4


  1. Real production GDP, annual average percentage change.
  2. Percent of labour force, June quarter, seasonally adjusted.
  3. Annual percentage change, June quarter.
  4. Percent of GDP.
  5. Total Crown operating balance before gains and losses (OBEGAL).
  6. Net core Crown debt excluding the New Zealand Superannuation (NZS) Fund and advances.

Sources: Statistics New Zealand, the Treasury

Finalisation Dates for the Update

Economic forecasts - 13 April

Tax revenue forecasts - 19 April

Fiscal forecasts - 29 April

Specific fiscal risks - 29 April

Text finalised - 20 May

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