Outcome: Improved Overall Economic Performance

The Treasury brings an overall perspective, including interests in institutions, macroeconomics and microeconomics, to advise Ministers on what really matters for New Zealand's economic performance.

Common with most Organisation for Economic Cooperation and Development (OECD) countries, recent economic performance has been poor. New Zealand's financial institutions have weathered the financial crisis well; however, this has not allowed the economy to escape the effects of global recession: real Gross Domestic Product (GDP) and real Gross National Product (GNP) fell 1% and 1.9% respectively in the year to March 2009 and unemployment increased by 1.2 percentage points.

As New Zealand and the global economy return to positive growth, it is important that two structural weaknesses are addressed:

• New Zealand's low level of GDP per hour worked (labour productivity), and
• macroeconomic imbalances (persistent current account deficits and very high net external indebtedness) that increase our vulnerability to any future external shocks.

Strong GDP performance since 2000 has masked two broad underlying weaknesses in the economy. The majority of GDP growth (around 1.8% p.a.) has been sourced from increased labour utilisation, and whilst this offers both social and economic benefits, it is not sustainable. Labour productivity grew at an average of just 1.3% p.a. between 2000 and 2008, falling from the 2% average achieved in the period from 1978. Accelerating labour productivity growth will be critical to achieving progress toward the Government's goal of reducing the income gap with Australia and other countries.

Further, economic growth has primarily been associated with rising consumption and significant macroeconomic imbalances. In particular, New Zealand has experienced a combination of a shortfall in national saving relative to investment over a very long period of time and a relatively high level of net external indebtedness. This tends to be associated with increased vulnerabilities, upward pressure on interest rates and can contribute to large swings in the exchange rate.

Future policy action should be focused on achieving the twin objectives of accelerating productivity growth and reducing macroeconomic imbalances. Shifting to a more balanced growth path driven by a greater contribution from productivity will require sustained effort on multiple fronts. However, the policies to achieve these twin aims are likely to be complementary in many cases: an environment that promotes increased saving and investment will also help to promote productivity growth and improve standards of living.

Overview of Progress in 2008/09

Some of the areas in which we have had a significant impact through our work this year include:

• Provided advice on medium-term economic and fiscal policy options and implementing a productivity-focused economic agenda.
• Provided advice on the October 2008 and April 2009 personal tax reduction packages and advice on pressures and directions for medium-term tax reform.
• Provided advice and support to Ministers on the Government's response to the financial crisis, including implementation of the Crown Deposit Guarantee Scheme and Crown Wholesale Guarantee Facility.
• Coordinated the Government's regulatory review agenda, provided advice on regulatory quality management, including measures to improve regulatory quality, and established the RIAT within the Treasury to independently assess the quality of regulatory impact analyses for significant regulatory proposals.
• Established the National Infrastructure Unit to assist the Government in developing an infrastructure programme that is both strategically sound and helps build a more competitive, more productive economy.
• Advised the Minister on climate change issues, including the economic impact of a range of target levels for reducing greenhouse gas emission levels relative to other countries, and options regarding an Emissions Trading Scheme.