Outcome: Stable and Sustainable Macroeconomic Environment
The Treasury provides advice on macroeconomic conditions and fiscal policy. We also provide economic and fiscal forecasts and produce the Crown Accounts.
A stable and sustainable macroeconomic environment contributes to higher economic growth by allowing individuals, businesses and the Government to plan more effectively for the longer term. This improves the quality and quantity of investment in physical and human capital and helps to raise productivity, and ultimately contributes to higher economic growth and higher living standards for New Zealanders.
Our focus throughout this year has been on areas where our work is likely to have the most impact on the performance of the macroeconomy, and in particular, the institutional frameworks that promote macrostability, and the sound operation of fiscal policy.
Overview of Progress in 2008/09
Macroeconomic conditions were particularly challenging in 2008/09. This was primarily owing to volatile international economic and financial market conditions, stemming initially from a meltdown of the US sub-prime mortgage market, and then the flow-on of this into the real economy around the world and in New Zealand. This impact came at a time when the domestic economy was already showing weakness as previous imbalances, particularly high house prices and high interest rates, unwound and the agricultural sector was only just starting to recover from the effects of the 2007/08 summer drought. The impact of these forces on the New Zealand economy significantly reduced tax revenue, leading to a marked deterioration in the fiscal position as projected under policies in place at the time of the Pre-election Economic and Fiscal Update (PREFU). These factors also led to a heightened degree of uncertainty about New Zealand's macroeconomic prospects and required additional effort to be applied to monitoring, forecasting and advising on economic developments.
In the event, economic activity declined sharply in the second half of 2008 and the economy continued to contract in the first half of 2009. The rate of decline in economic activity is forecast to slow in the second half of 2009 followed by a slow increase in forecast growth during 2010 and 2011. The current account deficit reduced slowly in line with these forecasts. However, inflation pressures have turned out to be lower and as a result monetary policy has loosened well in excess of earlier forecasts.
This environment formed the backdrop for the Treasury's advice on fiscal policy for Budget 2009, with a particular focus on advising the Government on initial ways to address the consequent deterioration in the fiscal outlook. Decisions taken in Budget 2009 markedly improved the fiscal outlook and avoided a credit ratings downgrade (although more latterly one agency, Fitch, has placed New Zealand on negative outlook). While Budget 2009 delivered the necessary set of decisions to stabilise and improve the fiscal outlook and begin a focus on baseline spending, more emphasis on this will be needed in the future. Looking forward, the public sector, supported by the Treasury, will need to find new ways of thinking about service delivery and funding priorities.
The fiscal strategy announced in Budget 2009 has also given renewed prominence to the long-term (40-year) fiscal projections. The decisions taken to address the medium-term fiscal position have brought the long-term pressures more to the fore in terms of individual spending areas - the reductions in growth necessary to live with the new fiscal strategy will require choices that can begin to address some of the longer-term challenges.
The NZDMO's work during 2008/09 was dominated by this worsening fiscal position (and consequent increase in forecast government debt) and the international financial markets crisis. A range of measures was introduced to support the increase in debt issuance, including increasing tender frequency from fortnightly to weekly, the introduction of tap tenders, and reverse tap tenders, and the introduction of a new long bond. NZDMO also adopted a more proactive approach to investor relations and marketing, and placed increased emphasis on relationships with credit rating agencies.
Looking forward, risks remain around the re-emergence of imbalances in the economy as part of the recovery, and the Treasury will be providing advice on policy choices to prevent or mitigate those risks.
Measuring Progress on our Results
The Treasury monitors the stability and sustainability of the macroeconomic environment through the Economic and Fiscal Updates and the Financial Statements of the Government of New Zealand, which include both fiscal and macroeconomic indicators of economic performance. As mentioned above, the economy contracted during the second half of 2008 and the first half of 2009. This should be seen in the context of a domestic economy that has had the longest period of economic growth since World War II, and a world economy where most developed economies faced multiple quarters of declining growth during 2008/09.
Like virtually all other forecasters, the Treasury did not foresee the speed or depth of the recession; however, for the whole of the 2000 to 2008 period we were the most accurate of 12 regular forecasters of the New Zealand economy. Compared with our target of ±3%, the forecast error for 2008/09 was -3.1%. However, the Budget did not forecast the extent of the shock in international financial markets and flow-on economic impacts, and was prepared with no knowledge of the SME package announced in February 2009, the April 2009 tax cuts or the outcome of the decision in a major court case between the IRD and the Bank of New Zealand (BNZ).
The fiscal outlook is weaker than was forecast in Budget 2008 owing to the decrease in revenue resulting from the recession. However, the Government's decisions in Budget 2009 meant that this deterioration in the fiscal outlook is not as large as it would have been had no action been taken to address the outlook - net Crown debt with no policy response was projected to reach over 60% of GDP by 2023 and still be trending upwards, compared to final Budget 2009 projections forecasting net debt at close to 30% of GDP by 2023, then trending down.
During the year, debt issuance was increased to its highest levels since 1991/92. Bonds issued under the domestic borrowing programme reached $5.5 billion by year end, compared with $1.9 billion in 2007/08.
