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Statement of Intent 2009-12 - The Treasury

Outcome: A Stable and Sustainable Macroeconomic Environment

What are we seeking to achieve?

A stable and sustainable macroeconomic environment allows individuals, businesses and the Government to plan more effectively for the longer term, contributing to higher economic growth and higher living standards for New Zealanders. By creating an appropriate environment for sustainable growth, macroeconomic performance is fundamental to all of the Government's policy objectives.

The New Zealand economy faces large challenges over the next few years as it deals with the effects of the global financial crisis. The economy is enduring a relatively prolonged period of negative or low growth, which will translate into a sustained period of operating deficits and increasing government debt. Unless corrective action is taken, government debt will reach levels not considered prudent. This will occur even before the pressures of an ageing population have an increasing effect on the fiscal position from the 2020s onwards. In turn, this will lead to reduced confidence in the New Zealand economy by international investors and rating agencies, leading to higher costs of borrowing and hence a negative impact on growth.

In light of this situation, we will be assisting the Government with the following over the next three years:

Economic and tax forecasting, and fiscal reporting

  • Policy decisions are based on the most accurate forecasts possible of the economic and fiscal outlook, and a good understanding of developments in the economy and the key underlying drivers of the outlook. They take account of the higher degree of uncertainty than usual around the future path of the economy.

Policy advice: Fiscal and macroeconomic

  • Debt as a percentage of GDP is stabilised at a prudent level, while taking appropriate account of the short-term impact of the Government's fiscal decisions on the economy. This will involve moving out of operating deficits (that is, closing the gap between the expenditure and revenue tracks) in a reasonable timeframe.
  • Action is taken to meet longer-term fiscal challenges, including the greater fiscal pressures that arise from an ageing population from the 2020s onwards. A sustainable long-term fiscal position will aid economic growth through keeping borrowing costs low and stable and providing a reasonable degree of certainty to individuals about the future path of government spending and taxes. As noted on page 8, long-term fiscal sustainability remains one of the Treasury's four SRAs.
  • We learn the lessons from the period of economic imbalances that preceded the economic downturn (for example, asset price bubbles). Any changes in the areas of fiscal, monetary, regulatory and tax policy that have merit in light of those lessons are made; that is, changes that would lead to greater stability in the macroeconomic environment (for example, inflation and GDP growth) in the future.
  • A framework is adopted for managing the risks on the Crown balance sheet at both the aggregate and individual entity levels (State-owned enterprises [SOEs] and Crown Financial Institutions [CFIs]), which helps ensure that the management of those risks is consistent with the Government's overall fiscal strategy. This is an area of increased priority for the Treasury, in line with the Government's priorities.

Fiscal management

  • The Budget process is consistent with the Government's overall fiscal objectives and ensures government spending is value for money; that is, it delivers desired outcomes at a reasonable cost.

Debt management

  • The NZDMO keeps debt servicing costs as low as possible in a difficult borrowing environment.

There are strong links between the results we are seeking in the macroeconomic outcome and the results sought in the economic performance and State sector performance outcomes. In the economic performance outcome, for example, we are helping the Government respond to the global financial crisis and to lift productivity so that the New Zealand economy comes out of the economic downturn in a stronger position. Regulatory and tax policy settings are relevant to ensuring the stability of the macroeconomy.

The performance of the State sector is fundamental to achieving a sustainable fiscal position as overall public sector productivity and the spending paths in key sectors, such as health, education and welfare, have substantial impacts on the aggregate fiscal position.

What will we do to achieve this?

In light of the economic situation, over the next three years we will focus on assisting the Government by:

Economic and tax forecasting, and fiscal reporting

  • Producing forecasts of the economic and fiscal outlook at least twice yearly (Budget Economic and Fiscal Update [BEFU] and Half Year Economic and Fiscal Update [HYEFU]), providing regular updates on developments in the domestic and international economies and providing monthly updates on the Government's fiscal position.

Policy advice: Fiscal and macroeconomic

  • Providing advice on:
    • how the Government can stabilise debt at a prudent level, and assisting the Minister of Finance to produce the annual Fiscal Strategy Report (FSR)
    • any changes the Government can make in the areas of fiscal, monetary, regulatory and tax policy to promote the stability of the macroeconomy, and
    • adopting a framework for managing risks on the Crown balance sheet, and operationalising this at both the aggregate and individual entity levels.
  • Producing the next Statement of the Long Term Fiscal Position by June 2010, promoting understanding of the long-term fiscal challenges within the public sector and among the wider public, and providing advice on expenditure and revenue options to address long-term fiscal pressures in ways that are consistent with ensuring value for money and promoting economic growth.

Fiscal management

  • Assisting the Government in managing the annual Budget process and providing advice to assist the Government to make expenditure and revenue decisions that contribute to its overall fiscal objectives, advance its other priorities and ensure value for money from expenditure. This will include assisting the Minister of Finance in producing the annual Budget Policy Statement (BPS).

Debt management

  • Managing and issuing Crown debt in a way that minimises borrowing costs and managing the financial assets under the control of the DMO in a way that maximises long-term returns within an appropriate risk management framework.

The Treasury will work closely with a range of government agencies, including the Reserve Bank, and engage with the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF).

How will we demonstrate success in achieving this?

We will have demonstrated success when:

  • in the annual FSR released on Budget Day, the Government shows that its fiscal plans will lead to levels of debt and net worth being maintained at, or returned to, prudent levels over the 15-year projection period
  • decisions are taken that help stabilise government debt and tax burdens as a percentage of GDP in 40 years under credible and reasonable assumptions
  • debt management strategy achieves an annual average borrowing cost from new issuance of core Crown debt that is lower than the long-run average cost of debt, and
  • New Zealand is one of the better performing OECD economies with respect to GDP and inflation variability.

The above success measures encapsulate what we need to achieve to meet the key challenges arising from the economic downturn. The first two measures relate to ensuring that the fiscal position is sustainable over time. The third measure is important because of the large increase in debt issuance that will result from the economic downturn. Finally, the fourth measure is about avoiding a repetition of the large build-up of imbalances in the economy that contributed to the current economic downturn.

Having volatility in GDP and inflation at reasonable levels is conducive to long-term economic growth, as high volatility can have a negative impact on the decisions of individuals and businesses; for example, investment decisions. Defining an absolute measure of volatility is difficult, particularly as some level of volatility is not problematic, but measuring ourselves against other OECD economies gives a good guide to our performance.

Measuring our service performance

In addition to the above measures of our impact, we have agreed a range of output performance measures for the 2009/10 financial year including a set of specific measures relating to managing the debt portfolio with an appropriate degree of risk. These measures are included in the Estimates.

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