Outcome: Improved Overall Economic Performance
The Government is committed to narrowing the income gap between New Zealand and other rich developed economies, such as Australia.
The Treasury assists the achievement of this goal by providing policy advice on how to raise New Zealand's productivity performance relative to other rich economies so that we can lift our potential growth rate and our living standards in the years ahead.
An economy's productivity performance is a measure of the degree of efficiency with which its firms and organisations, including those in the public sector, turn inputs (labour and capital) into outputs (goods and services). New Zealand's productivity performance has lagged that of other developed nations over a timeframe of several decades.
In the year under review, the Treasury provided advice on the future direction of the Government's Economic Growth Agenda to support the goal of closing the income gap with Australia. This involved coordinating advice across the public sector, leading the development of progress reports to Cabinet, as well as advancing a number of work streams that will increase our understanding of the challenges facing the New Zealand economy, and therefore the future directions for policy. This included work on cross-cutting issues affecting our economic performance, such as the determinants of New Zealand's interest rate premium relative to the rest of the world, the drivers of New Zealand's exchange rate cycle and the implications of economic geography for policy advice. The Treasury also served as the secretariat for the 2025 Taskforce, providing analytical support for the Taskforce's first report in November 2009 and ahead of its next report (due in November 2010).
While the Treasury helped the Government manage the recovery out of the 2008/09 international economic and financial crisis we also worked to ensure that short-term measures adopted to support New Zealanders were consistent with the need to lift the productivity performance of the New Zealand economy in the years ahead.
The Government's economic strategy is based around six drivers of economic growth:
- investment in productive infrastructure
- removing red tape and improving regulation
- supporting business innovation and trade
- improving education and lifting skills
- lifting productivity and improving services in the public sector, and
- strengthening the tax system.
As the Government developed its economic strategy, the Treasury shifted away from the strategic result areas identified in its 2009-2012 Statement of Intent to focus more on the six drivers of economic growth. In 2009/10 we contributed directlyto four of the drivers:
- Investment in productive infrastructure
The NIU drove improvements in the Government's approach to infrastructure policy through the development of the first National Infrastructure Plan, published in March 2010. The Plan set out the Government's strategy, priorities and planned infrastructure investments, heralding a new transparency which will facilitate more informed public and private sector investment planning and decision-making in the years ahead.
- Removing red tape and improving regulation
We improved both the stock and the flow of regulation by helping the Government reform the institutional arrangements for the development of regulation and by contributing to a set of major regulatory reviews.
- Lifting productivity and improving services in the public sector
We helped the Government redirect $1.8 billion over four years to frontline services. (See the Improved State Sector Performance outcome on pages 12 to 17 for further details.)
- Strengthening the tax system
The Treasury and the Inland Revenue Department (IRD) advised the Government ahead of the decisions announced in Budget 2010 which heralded the most significant package of tax reform in over a generation. The tax package will improve the incentives to work, invest and save, as well as reduce tax biases in favour of property investment.
We also worked with other agencies to support business innovation and trade, improve education and lift skills.
Some of the work programmes we undertook to assist the Government to improve economic performance included:
Infrastructure
The NIU assisted the improvement of the public sector's management of infrastructure assets by leading cross-government work on the use of better capital asset management techniques, systems to improve rigor in decision-making and public private partnerships (PPPs) to introduce contestability in procurement decisions. The NIU has published guidance on PPPs, and two PPP projects have now been approved by Cabinet.
Regulatory Quality
The Treasury advised the Government on options for reform to the institutional arrangements around the development of regulation, including the strengthening of the Regulatory Impact Assessment regime and requiring government agencies to scrutinise the existing stock of regulation. We have supported the taskforce that is taking forward the Regulatory Responsibility Bill, and led policy development on the establishment of a New Zealand Productivity Commission, which will provide the Government with independent advice on how to lift productivity. Policy teams around the Treasury contributed to the major regulatory reviews launched by the Government covering legislation such as the Resource Management Act 1991, Securities Act 1978 and Building Act 2004. Our advice on these reviews is intended to help the Government develop good-quality regulation and sound, durable institutions that foster trust and confidence among stakeholders.
Tax Strategy
The Treasury assisted the Tax Working Group's independent assessment of the New Zealand tax system through the provision of technical papers, presentations and secretariat services. Our major output was the delivery of the Budget 2010 Tax Package in conjunction with IRD. The Tax Package constituted the largest tax reform in 25 years and included a change in the tax mix from income tax to GST, various efficiency-enhancing base broadening measures, compensation measures for vulnerable groups in society and measures designed to increase the integrity of the tax system. The Treasury provided policy, technical, costing and distributional analysis for Ministers. The Tax Package announced by the Government was widely accepted by stakeholders as a growth-positive step change which was also fair and equitable.
Natural Resource Management
The Treasury was closely involved in the work to develop New Zealand's climate change targets for the United Nations Climate Change Conference at Copenhagen in December 2009, and is now working with other government agencies to prepare for the next Climate Change Conference at Cancun. We have also been involved in finalising policy for the domestic Emissions Trading Scheme (ETS), which was amended in November 2009 and came into force for the stationary energy, industrial processes and liquid fossil fuels sectors on 1 July 2010. We have contributed to the Government's resource management reforms, with a particular focus on freshwater management and the review of the Resource Management Act 1991. We focused our efforts on the development of policy that will encourage the productive use of New Zealand's natural resources.
Skills
The Treasury worked with Ministers and the Ministry of Education (MOE) to ensure a broad focus on lifting the achievement of all school leavers, as reflected in decisions on the initial implementation of the Youth Guarantee and Trades Academies initiatives. We also worked with Ministers and agencies to identify the system changes needed to give effect to the Government's Tertiary Education Strategy, issued in December 2009, which places an emphasis on young people and on getting more people through the system at higher levels. These changes, including recent decisions to publish performance information from providers, introduce performance-linked funding and link eligibility for student loans to passing courses, are intended to lift the performance of both students and providers. Our work has also contributed to the rationalisation of a number of special funds that were poorly linked to educational or research outcomes, freeing up resources for extra places and cost pressures. We anticipate that these decisions will collectively result in higher student achievement over time - with more young people achieving better school-level qualifications and completing higher-level tertiary qualifications - and that these higher skills should help drive higher labour productivity and living standards in the future.
International Connections
The Treasury contributed to improving the cross-border flow of people, capital, ideas and trade through our work on reviewing the Overseas Investment Act 2005 to remove unnecessary impediments to overseas investment in New Zealand, agreeing arrangements with Australia to allow the portability of retirement savings and advancing negotiations with Australia on an investment protocol to make it easier for residents in one country to invest in the other. We also participated in the Trans-Pacific Partnership free trade negotiations and the review of New Zealand's offshore network, began identifying the next steps for the future development of the Single Economic Market with Australia and undertook research on factors influencing trade and performance in the services sector.
Enterprise and Innovation
The Treasury advised the Government on how to support a competitive business environment that rewards business investment, innovation and enterprise. This included joint advice with the Ministry of Research, Science and Technology (MoRST) and the Ministry of Economic Development (MED) on initiatives to increase firms' expenditure on research and development and policies to support the transfer of knowledge between our public research organisations and firms. We advised on the governance and structures of public sector agencies involved in innovation policy and delivery and on how to maximise the contribution of CRIs to New Zealand's economic performance through our participation in the Crown Research Institute Taskforce. We also provided advice on the value for money of government expenditure on innovation and enterprise.
Crown Balance Sheet Risk Management
In 2009/10, we undertook development work on measuring and understanding Crown risk. In particular, we: developed a new Crown risk model; provided advice on how to think about Crown risk overall, culminating in a set of reports to Ministers covering both aggregate and commercial portfolio risk; included more discussion of risk and the balance sheet in Budget 2010 documents including the 2010 FSR.
New Zealand Export Credit Office
As part of the response to the global financial crisis, the Government decided to expand the range of NZECO's products in two key areas: NZECO entered the short-term trade credit insurance market to complement private sector provision and the Crown provided NZECO with additional capacity of $200 million to meet increased demand. NZECO has supported $172 million of exports through bond guarantees and $382 million of exports through short-term trade credit guarantees. In addition to transactions underwritten with the private sector, NZECO issued a total of 122 short-term trade credit guarantees covering transactions in 43 countries across a range of industries. Overall, in supporting export growth, NZECO also continued to generate premium in excess of its costs, including the cost of paying its first claim, with net income from insurance operations totalling $0.639 million.
Guarantee Schemes
During the recent global economic and financial crisis and its aftermath, we advised the Government on the appropriate macroeconomic policy settings in response to the evolving macroeconomic context, including the implications for New Zealand of the European sovereign debt crisis. With the domestic and global economies recovering, our attention in 2009/10 shifted from crisis management to the appropriate pace of unwinding fiscal policy stimulus. During the year under review, we alsomade a number of adjustments to the policies introduced as temporary crisis measures in 2008. The original Crown Deposit Guarantee Scheme was extended on tighter terms and conditions until 31 December 2011. The original scheme (which will close on 12 October 2010) was amended with regard to controls from 1 January 2010. The Government closed the Crown Wholesale Guarantee Facility on 30 April 2010 as the institutions using the facility were again able to access wholesale funding markets without a Crown guarantee.
