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Outcome: A Stable and Sustainable Macroeconomic Environment

Net core Crown debt to nominal GDP
Net core Crown debt to nominal GDP   .
Source:  The Treasury

A stable and sustainable macroeconomic environment is required in order to deliver broad and enduring prosperity. High private sector debt levels, built up in tandem with a long-running low national saving rate and a period of extended asset prices, conspired to maintain vulnerabilities for the economy in 2010/11. Instability can be triggered by both domestic and external events, both economic and non-economic, but by maintaining relatively low Crown debt levels, the Government was able to adopt a measure of flexibility to manage shocks to the economy during the year under review. Minimising significant or abrupt adjustments in Crown fiscal policy supports efforts to deliver higher living standards over time.

How We Have Contributed to This Outcome

The Treasury provided advice to the Government on ways to manage risks associated with New Zealand's high external debt position in what was at times an uncertain global environment, with a particular emphasis on options to achieve faster fiscal consolidation.

In Budget 2011, the Government agreed operating and capital allowances based on targeting spending to where there is most need and benefit, of making sure that the benefits outweigh the costs of interventions and ensuring that State interventions meet or exceed the performance in other developed countries.

During the year we also continued to effectively undertake economic and fiscal monitoring, reporting and forecasting, all critical to identifying emerging risks to macroeconomic stability and for identifying timely policy options where appropriate.

To help deepen our understanding, enhance the quality of public debate and to assist good policy formation, we published working papers on exchange rate variability, the impact of fiscal policy on the business cycle, modelling of fiscal risks, the drivers of New Zealand's relatively high interest rates and a paper on New Zealand's macroeconomic imbalances. Much of this work also formed the basis for a savings discussion document, which was produced to assist the Savings Working Group. We also co-hosted, along with RBNZ and Victoria University of Wellington, a forum on the causes and possible remedies for New Zealand's macroeconomic imbalances.

Outcome and Intermediate Outcome Indicator and Measure
Outcome and Intermediate Outcome Indicators and Measures: Position in 2010/11

Outcome: A Stable and Sustainable Macroeconomic Environment

New Zealand's sovereign credit ratings are AAA with stable outlook, with current concerns about external vulnerability reduced.

Target in 2011-16 SOI: By 2015/16 these are increased to AAA with stable outlook (currently AA+). 

Moody's has had New Zealand's foreign-currency credit rating at AAA since late 2002. Standard and Poor's has New Zealand on a rating of AA+, and placed that rating on negative outlook in late 2010.  Fitch has had the rating at AA+ with a negative outlook since late 2010.

Crown net debt levels.

Target in 2011-16 SOI: Crown net debt projections trend down to between 10% and 20% of GDP, and indicators of long-term fiscal sustainability show improvement in successive fiscal statements. 

Core Crown net debt is currently around 20% of GDP, and is projected to peak at 29.6% in 2014/15, before trending down to under 20% by 2020.

The forecast peak in core Crown net debt is higher for 2014/15 than forecast at the time of the 2010 Fiscal Strategy Report (FSR) as a result of the fiscal costs of the Canterbury earthquakes, but the medium path is lower.

Gross national saving rates.

Target in 2011-16 SOI: Gross national saving is trending toward 25% of GDP over the next five years and remains elevated.

Gross national saving is estimated to have increased to around 18% in the year ended March 2011, up from a low of around 15% in the 2009 March year.

Inflation and inflation expectations.

Target in 2011-16 SOI: Inflation and inflation expectations remain anchored within 1% to 3%.

The annual Consumer Price Index (CPI) inflation rate in the year to June 2011 stood at 5.3%, heavily influenced by the rise in GST on 1 October 2010. The five-year average of inflation outturns increased to 3%, the top of the target band.  Two-year ahead inflation expectations increased to 3% in the June quarter, up from 2.8% a year ago.

Intermediate outcome: A stable macroeconomic environment

The overall level of financial stability risk does not materially increase above a normal range, as indicated by the cobweb model published in RBNZ's Financial Stability Reports.

Target in 2011-16 SOI: Financial stability risks related to New Zealand are either generally falling or are within the normal range (as indicated by the domestic components of the cobweb model published in RBNZ's Financial Stability Report).

Two dimensions of RBNZ's financial stability cobweb (financial market conditions and the global environment) improved between May 2010 and May 2011, but four out of five dimensions remain above their normal range.

Variability in GDP growth is in the lowest third of OECD countries and absolute falls in annual real GDP are avoided.

Target in 2011-16 SOI: Variability in GDP growth is minimised and absolute falls in annual real GDP are avoided.  Variability is in the lowest third of OECD countries, and below that recorded in the past three decades.

The standard deviation of New Zealand's annual real GDP growth was around 2.2 percentage points in the 10 years to 2010 (12th out of 34 OECD economies), compared to 2.1 (13th out of 28) and 2.6 (19th out of 29) in the 1980s and 1990s respectively.

The Treasury's research and effective and timely advice allows governments to operate fiscal policy that is not excessively pro-cyclical.

Target in 2011-16 SOI: Effective and timely Treasury advice allow government to operate fiscal policy that is not excessively pro-cyclical (as measured by a range of indicators), especially during the upswing in the business cycle, and does not contribute to build-up and continuation of imbalances.  One test is that revenue surprises are used to pay off debt.

Measures of the fiscal stance are subject to significant uncertainty. The Treasury's fiscal impulse indicator suggests that over the 2011/12, 2012/13 and 2013/14 fiscal years, fiscal policy will subtract from aggregate demand in the economy, at a time when real GDP growth is forecast to be above potential.

Core Crown expenses as a share of GDP are forecast to decrease from 36.4% in 2010/11 to 31.3% in 2014/15, subtracting directly to demand pressures in the economy.

The Treasury's research identifies the main sources of build- up in New Zealand's economic imbalances.

Target in 2011-16 SOI: The Treasury's research identifies the main sources of economic fluctuations and build-up of imbalances, including the respective roles of micro and macro policy settings.  Our advice on fiscal and other settings will assist government accordingly.

Published working papers on: "Economic Imbalances: New Zealand's Structural Challenge"; "Why are Interest Rates in New Zealand So High: Evidence and Drivers"; "New Zealand's Exchange Rate Cycles: Impacts and Policy".

Organised New Zealand's Macroeconomic Imbalances - Causes and Remedies Policy Forum. Presented paper on "Making Fiscal Policy More Stabilising in the Next Upturn: Challenges and Policy Options".

Intermediate outcome: The State sector allocates resources to where they are most effective and delivers services in the most efficient way

The Government accounts return earlier to fiscal surplus.

Target in 2011-16 SOI:The Treasury's advice and options assist the Government to return earlier to fiscal surplus.

Budget 2011 forecasts a return to operating surplus (before gains and losses) in 2014/15.

Our advice helps government reduce the long-term fiscal gap, starting with a reduction in the projected peak in net debt during 2013/14.

Target in 2011-16 SOI: The Treasury's advice and options assist the Government to return earlier to fiscal surplus. The Treasury's advice helps government to reduce the long-term fiscal gap, starting with a reduction in the projected peak in net debt during 2013/14.

Core Crown net debt is forecast to peak at 29.6% of GDP in 2014/15.

Cost of borrowing is minimised subject to an acceptable level of risk.

Target in 2011-16 SOI:The average cost of new core Crown borrowing is less than the long-run borrowing rate of 6%. The nearest bond maturity will be fully funded from NZDMO's holdings of cash and short-term liquid assets within three months of maturity. 

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