Operating Intentions

The Treasury is looking to have an impact on three outcomes. Each outcome area includes core work, work on the Government’s priorities, work on strategic result areas and collaborative work with other agencies. We outline our focus for the next three years for each outcome area in the following pages.

Outcome: improved overall economic performance

What are we seeking to achieve?

New Zealanders aspire to have living standards that are among the best in the world. Achieving this requires a commitment to raising our incomes and improving economic growth, and the key to achieving this is improving New Zealand's productivity. Productivity is about how efficiently a firm or organisation can turn its inputs, such as labour and capital, into outputs. Our capacity to raise our income depends primarily on our ability to raise the level of output per worker.

The Treasury's research has identified five areas that lie at the heart of lifting productivity: innovation; enterprise; investment; skills; and natural resources (see the diagram below). In addition, our work on international connections, one of the Treasury's four SRAs, and good State sector performance are critical to supporting these drivers. Understanding how we can use these five drivers better is a central part of our strategy for providing the Government with advice on how to lift New Zealand's productivity.

What will we do to achieve this?

Over the past year, the global economy has experienced a very significant deterioration. To improve economic growth and living standards we will support the Government by providing advice on how to implement growth-enhancing policies in relation to both:

• management of the short-term economic challenge, and
• the longer term, as more favourable economic conditions return.

This means that the Treasury will need to be more selective in its work over the next few years. In the short term it also means we will have less opportunity to invest in understanding some of the longer-term issues in all our strategic result areas.

Responding to the crisis

The Treasury will respond to the global economic crisis by providing policy advice and undertake operational activities to help the Government manage the New Zealand economy through a difficult period, and to help the economy respond in ways that will best advance productivity goals once world growth resumes.

We will provide policy advice to the Government around the financial sector, provide options on measures to lessen the impact of the downturn and provide advice on policies that will have the most beneficial impact on our future productivity. We will also undertake operational roles to support the economy such as managing a Deposit Guarantee Scheme and the Wholesale Guarantee Facility for the financial sector. The purpose of both schemes is to ensure continued confidence in our banking system by guaranteeing money deposited or lent to our banks. Our aim is to ensure:

• an early resumption of economic growth is accompanied by a rise in trend productivity
• we continue to maintain a robust and efficient financial sector
• we have durable institutional arrangements in place for the longer term, and
• crisis interventions are consistent with medium/long-term economic policy direction.

The New Zealand Export Credit Office (NZECO)

We will continue to provide financial guarantee products for New Zealand exporters and banks. Our products help exporters manage risk and capitalise on trade opportunities around the globe. The global financial crisis and global recession have led to increased demand for NZECO’s products and an increased requirement for education on how to use these products.

Regulatory quality

The Government has assigned the Treasury the responsibility for overseeing and coordinating its regulatory quality system, reflecting its concern that poor-quality regulation is holding back productivity, innovation and investment. Our priorities in the near future include:

• providing advice, in collaboration with the Ministry of Economic Development (MED), on redesigning and strengthening the regulatory quality management system to support the Government's objective of less and better quality regulation
• advising and managing the Government's regulatory reform agenda for the next two years
• advising on institutional arrangements that best enable improvements in the stock of existing regulation, and
• providing secretarial support to the taskforce established by the Government to take forward the Regulatory Responsibility Bill and giving effect to the Government's response to the taskforce's report.

Infrastructure

Enhancing infrastructure planning and ensuring higher-quality asset management are important parts of the Government's economic agenda. The Treasury's work relating to infrastructure is organised through the National Infrastructure Unit, which the Government established as the primary source of support for the Minister for Infrastructure. One of the key contributions the Unit will make is to provide advice to the Government on the formulation and implementation of a 20-year National Infrastructure Plan or “blueprint” for New Zealand. We will also take an active role in encouraging best practice project appraisal, identifying barriers to more efficient and effective infrastructure investment and developing new approaches to infrastructure procurement.

Continuing to focus on longer-term challenges

Last year, the Treasury committed to working on four SRAs, three of which had particular significance to the economic performance outcome. We highlighted these as strategic priorities, not only because they have the potential to have pervasive impacts on New Zealand's economic performance in the medium to long term, but also because we believed that our investment in these areas, framing the debate and crystallising strategic options and trade-offs, offered the greatest potential return. Of course, the SRAs do not represent all of our contributions to the outcome or everything that we think is important for growth.

As we noted on page 8, we agreed to continue our focus on these SRAs over the next three years, particularly in investment work on longer-term challenges and opportunities. The three SRAs with direct relevance to the economic performance outcome are:

• International connections - Given New Zealand’s geographical remoteness and dependence on trade, we need to view the five productivity drivers through an international lens. International connections are about flows of people, capital, ideas and trade in and out of New Zealand, and we need to use these to increase productivity and growth in the New Zealand economy. This includes taking an international perspective on our domestic policies.
• Skills -Achieving a substantive increase to New Zealand's economic growth and living standards through a focus on New Zealand's collective skills base.
• Natural resource management to ensure a sound basis for a sustainable and productive economy. We are seeking economic sustainability for New Zealand in a world of limits. We want to see the New Zealand economy using natural resources sustainably and productively.

While the SRAs are where we want to put more of our focus over the longer term, we will continue to provide advice on the wide range of policies and cross-cutting issues that affect productivity. These include advice on financial markets, investment and savings, supporting innovation and tax.

Natural resource management

While we are limited in our ability to progress the SRAs in the short term, we will seek to lead the policy debate on how to achieve an economy that is both sustainable and productive. We will focus on natural resource management, specifically regarding climate change and water management.

We will advise on the implementation of effective and predictable policies to meet New Zealand's current climate change commitments and help efficient adjustment to climate change to occur. With respect to climate change, we are aiming to ensure New Zealand meets national emissions targets at low economic cost and that the domestic carbon price is close to international prices. With respect to water management, we are seeking allocation systems for water that encourage productive use.

How will we demonstrate success in achieving this?

We will assess our impact by monitoring trends in the following economic performance measures. The Treasury has an indirect impact on these through our policy advice.

Productivity measures - labour productivity, capital productivity and multifactor productivity

Higher productivity measures indicate that we are producing greater value with the same amount of labour and being smarter about bringing together people, equipment and ideas to develop products and services. New Zealand's annual average productivity is low, relative to many other economies. In 2006 New Zealand's productivity ranked 22nd of 30 nations in the OECD and around 25% below the OECD average and 30% below Australia. We are looking to increase New Zealand's productivity rates gradually over time and to reduce the gap between us and other OECD economies.

International comparisons of our gross domestic product (GDP) and gross national product (GNP) per capita

GDP and GNP are important measures for the Treasury because the difference between our incomes and those of the leading OECD countries primarily reflects our economy's productive capacity - how effective our businesses are at combining labour and capital - and the prices of what we produce. While the Treasury does not have a direct impact on GDP, it can have an indirect impact through the policy advice it provides to the Government. We have experienced relatively high growth rates over the past 10 years. However, we have revised the outlook for growth in New Zealand's trading partners downwards progressively. Therefore, in our December economic and fiscal forecasts we forecasted weaker GDP over the next few years. We estimated growth at 0.8% in 2010, followed by recovery to around 3% in 2011 and just below 4% in 2012 and 2013. Although we expect growth will be weak, one possible measure of the strength of our economy will be to compare our performance with similar economies to see whether their growth rates have been able to rebound more quickly and strongly.

Measuring our service performance

Our output performance measures are included in the Estimates. As much of our outputs are policy advice, we will be using the Treasury quality standard for ensuring the quality and timeliness of these outputs. We have also defined measures for the more operational functions we perform.