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Annual Report of the Treasury for the Year Ended 30 June 2012

A Stable and Sustainable Macroeconomic Environment

A stable and sustainable macroeconomic environment is necessary for broad and enduring prosperity. Macroeconomic stability (as partly indicated through inflation, see graph below) provides households and firms with the predictability and certainty they need to make good decisions about employment, saving, investing, innovating and pursuing opportunities.

Inflation and inflation expectations
Inflation and inflation expectations.

Global economic and financial conditions continue to have a major bearing on domestic economic and financial developments and overall macroeconomic stability.

Our vulnerable macroeconomic environment

During the year the rating agency Standard and Poor's (S&P) reduced New Zealand's sovereign credit rating one notch. They cited New Zealand's external vulnerability as highlighted by our low savings rates (although successive forecast updates, including Budget 2012 forecasts, show gross national saving increasing to around 20% of GDP over the next five years compared to a recent low of around 14% in 2008/09) and net debt position.

Core Crown net debt
Core Crown net debt.

Managing and ultimately reducing the risks associated with these vulnerabilities is central to macroeconomic stability. Macroeconomic stability is supported by having sound macroeconomic and microeconomic settings and environment in place to ensure that we can weather the external shocks that come our way, as well as ensuring that policy itself is not a source of domestic imbalances. A sustainable fiscal position contributes directly towards macroeconomic stability. The Treasury provides advice and services on both these elements.

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