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Budget 2017 Home Page Budget Economic and Fiscal Update 2017

Scenario One - Net migration inflows remain close to current levels leading to higher GDP and larger budget surpluses

This scenario illustrates the impact of higher migration on the economic and fiscal outlook when capacity constraints arise. In this scenario, net migration is assumed to remain around its current level of 70,000 per annum through to the end of the forecast period. We further suppose that there are limits on the pace at which capacity can continue to expand. This may be the case if it takes time to expand the skilled construction-related workforce and to increase the supply of materials.

The recent strength of net migration inflows reflects the relatively favourable labour market conditions prevailing in New Zealand. Migration may prove to be higher than assumed in the main forecast if the performance of foreign labour markets, and the Australian labour market in particular, are weaker than expected, or if the domestic demand for labour proves to be stronger than anticipated. In this scenario, the working-age population expands over 2.0% per year and is 2.1% higher (94,000) in 2021Q2 (Figure 3.5).

Figure 3.5 - Stronger growth in the working-age population
Figure 3.5 - Stronger growth in the working-age population.
Sources: Statistics New Zealand, the Treasury

This scenario also incorporates the March 2017 quarter inflation outturn and assumes June quarter 2017 inflation is higher than in the main forecast. This could be owing to the effects of poor weather at the start of the quarter or greater-than-expected capacity pressures in the non-tradables sector, including construction.

Construction activity has increased significantly in recent years and is now at a record high share of total activity. The demand for resources from the construction sector is contributing to capacity pressure. This is reflected in increasing prices for the construction of new dwellings.

In this scenario, stronger population growth drives faster growth in household consumption, residential investment and business investment. Stronger domestic demand is reflected in faster employment growth. However, in the construction sector, it becomes increasingly difficult to access labour and materials. As a consequence, there is additional upward price pressure on construction costs, which leads to higher headline inflation (Figure 3.6). The policy interest rate rises earlier and the exchange rate is higher as monetary policy seeks to stabilise inflation. Reflecting these conditions, growth in labour productivity, real wages and real GDP per capita is more moderate than in the main forecast.

Figure 3.6 - Inflation is higher
Figure 3.6 - Inflation is higher.
Sources: Statistics New Zealand, the Treasury

Overall, both real GDP growth and inflation are stronger over the forecast period. Consequently, nominal GDP growth is also stronger. Nominal GDP is around $21 billion higher over the four fiscal years from June 2017 to June 2021. This additional income generates core Crown tax revenue that is $6.8 billion higher than the main forecast.

In this scenario we assume that the Government's operating and capital allowances are unchanged from those in the main forecast (see Chapter 2 for details). Under these assumptions, OBEGAL surpluses increase in each fiscal year and reach $10.2 billion (3.0% of GDP) in 2021 (Table 3.1).

In practice, a significantly faster pace of population growth will have broad implications for a range of publically provided services including health, education and transport. However, as discussed in the 2016 Half-Year Fiscal and Economic Update, the effects on the Government's spending plans are difficult to isolate and the Government has a range of choices available to meet additional demand pressures.

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