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Budget 2017 Home Page Budget Economic and Fiscal Update 2017

Executive Summary

Summary of the Treasury's economic and fiscal forecasts

June years 2016


Real production GDP (annual average % change) 2.7 3.1 3.5 3.8 2.9 2.4
Unemployment rate (June quarter) 5.0 5.0 5.0 4.6 4.3 4.3
CPI inflation (annual % change , June quarter) 0.4 1.8 1.6 2.1 2.2 2.1
Current account balance (% of GDP)  (2.9)  (2.8)  (3.0)  (3.3)  (3.7)  (3.9)

Fiscal (% of GDP)

Core Crown revenue 30.1   30.0   29.7   29.5   29.7   29.8
Core Crown expenses   29.2   28.8   28.6   28.1   27.7   27.5
Total Crown Operating balance before gains and losses   0.7   0.6   1.0   1.4   2.0   2.2
Core Crown residual cash   (0.5)   0.0   (0.6)   (0.5)   0.5   0.4
Net core Crown debt   24.4   23.2   22.8   22.1   20.6   19.3
Net worth attributable to the Crown   35.3   37.2   37.5   37.9   39.2   40.9

Sources: Statistics New Zealand, the Treasury

Real GDP growth in the New Zealand economy is forecast to pick up slightly in 2017, supported by migration inflows, investment and a recovery in exports. Growth is then forecast to accelerate to a peak of 3.8% in 2019 as investment growth gains momentum and private consumption is supported by income gains associated with the Family Incomes Package. Slower population growth as net migration inflows subside, easing construction growth and rising interest rates contribute to a moderation in real GDP growth to 2.4% by 2021.

Unemployment is expected to remain around 5% over the year ahead, as robust employment growth is balanced by high labour force growth, before steadily declining to the long run unemployment rate of around 4 1/4. Underlying inflationary pressures are expected to rise as spare capacity in the economy is used up, stabilising CPI inflation around 2% from mid-2019. The terms of trade have recovered a little faster than expected in the Half Year Update and are expected to remain broadly flat at a relatively high level across the forecast period. The current account deficit widens but remains under 4% of GDP.

Nominal GDP growth averages 5.1% per year over the forecast, with the level of nominal GDP a cumulative $23.9 billion higher than in the Half Year Update in the five years to June 2021, in part reflecting a higher starting point.

The Crown's fiscal position has improved over the past five years with an operating balance before gains and losses (OBEGAL) surplus being recorded in both the previous two fiscal years. These steadily improving fiscal results are expected to continue, as a growing nominal economy is forecast to drive growth in tax revenue.

Budget 2017 sees the introduction of a Family Incomes Package that both reduces tax revenue and increases social assistance expenditure such as Working for Families, with the 2019 June year being the first full year of these changes. New operating spending averages $1.8 billion per year over the forecast period (compared to $1.5 billion previously forecast). Future operating allowances have also been increased with new operating spending set at $1.7 billion for Budget 2018, increasing by 2% for subsequent Budgets.

New capital spending was increased to $4.0 billion (compared to $3.0 billion previously forecast). The capital allowance for Budget 2018 has been set at $2.0 billion and $2.5 billion for Budgets 2019-21.

Net core Crown debt is expected to decline as a percentage of nominal GDP over the forecast period, to stand at 19.3% by 2020/21. Core Crown residual cash is broadly neutral over the forecast period, with cash deficits in the next two years mostly offset by cash surpluses at the end of the forecast period. Net core Crown debt, in nominal terms, increases in the first three years of the forecast before beginning to decline to $62.8 billion by 2020/21.

The economic outlook is subject to a range of risks and uncertainties, with global risks skewed to the downside while domestic risks are more balanced. The fiscal outlook will be affected if risks were to eventuate and have a material impact on the economy.

Finalisation Dates for the Update

Economic forecasts - 13 April

Tax revenue forecasts - 21 April

Fiscal forecasts - 3 May

Specific fiscal risks - 3 May

Text finalised - 19 May

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