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Pre-election 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  2.8  3.2  3.7  2.8  2.3
Unemployment rate (June quarter)  5.0  4.9  4.7  4.4  4.3  4.3
CPI inflation (annual % change, June quarter)  0.4  1.7  1.3  1.9  2.1  2.1
Current account balance (% of GDP)  (2.9)  (3.1)  (2.2)  (2.8)  (3.3)  (3.9)
Fiscal (% of GDP)            
Core Crown tax revenue  30.1  30.4  29.9  29.6  29.8  29.9
Core Crown expenses  29.2  28.6  28.7  28.2  27.7  27.7
Total Crown operating balance before gains and losses  0.7  1.4  1.0  1.2  1.9  2.0
Core Crown residual cash  (0.5)  0.6  (0.5)  (0.5)  0.6  0.3
Net core Crown debt  24.5  22.5  22.0  21.5  20.0  18.8
Net worth attributable to the Crown  35.3  40.5  40.5  40.9  42.0  43.5

Sources: Statistics New Zealand, the Treasury

New Zealand's economy and the Crown's books are in a sound state.

The economy is expected to continue its steady growth over the 4-year forecast period. Growth in real GDP is forecast to pick up to 3.7 percent in mid-2019 before easing to 2.3 percent in 2020/21.

The stronger period of economic growth over the next two years or so is expected to lead to a gradual decline in the unemployment rate and a pick-up in wages and prices that lifts inflation to 2.1 percent in 2019/20. Beyond 2019, slower population growth and reduced monetary policy stimulus are forecast to lead to slower economic growth. The forecast growth profile is a little lower than in the Budget Economic and Fiscal Update (Budget Update), mostly reflecting a smaller contribution to growth from residential investment. As a result, over the four years ending June 2021, nominal GDP is 0.2 percent ($2.6 billion) lower than in the Budget Update.

The 2016/17 fiscal result is anticipated to be stronger than expected while fiscal forecasts for the next 4 years remain fairly close to the Budget Update. The operating balance before gains and losses (OBEGAL) surplus is estimated to reach $3.7 billion in 2016/17, largely reflecting stronger tax revenue growth. Owing to the one-off nature of some of the factors behind the tax revenue growth in 2016/17, the rate of growth is not expected to continue. Budget allowances remain unchanged from those set out in the 2017 Fiscal Strategy Report (FSR).

Largely as a result of the expected improvement in the 2016/17 fiscal results, net debt is estimated to be $2.0 billion lower than anticipated in the Budget Update by 2020/21 to stand at 18.8 percent of GDP. Contributions to the New Zealand Superannuation Fund are forecast to resume that year. Projections show net debt as a share of GDP continuing to decline beyond 2020/21, based on the same assumptions for operating and capital allowances as in the FSR.

The economic and fiscal outlook is subject to a range of assumptions, risks and uncertainties. For the fiscal forecast, a judgement has been made that the current strength in tax revenue does not continue throughout the forecast period. For the economy, the terms of trade may be stronger if prices for key export commodities hold up for longer than expected, or domestic demand may be lower if households' expectations of future income and wealth are dampened by slow wage growth or weaker house price growth. More detail and discussion of assumptions, risks and uncertainties are included in the Fiscal Outlook, Specific Fiscal Risks, Economic Outlook, and Risks and Scenarios chapters.

Finalisation Dates for the Update

Economic forecasts 21 July

Tax revenue forecasts 26 July

Fiscal forecasts 7 August

Specific fiscal risks 7 August

Text finalised 15 August


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