Outcome: A Stable and Sustainable Macroeconomic Environment

What are we seeking to achieve?

Net Core Crown Debt to Nominal GDP

Source: Treasury

The global financial crisis illustrated that an extended period of strong economic growth is not sufficient to ensure high living standards for current and future generations. The macroeconomic environment and the government policies that lie behind it must be both stable and sustainable to deliver broad and enduring prosperity. High net debt, low national savings and unnecessary variability in the growth of GDP generate vulnerabilities to the economy. Instability can also be driven by external events, and low net debt provides the ability to manage the impact of such events on New Zealand.

Higher national saving will enable investment to occur while allowing room for the vulnerability associated with external financing to fall. We aim to help government lift its contribution to national savings and to achieve a significant lift in gross national saving to avoid triggering significant and abrupt adjustments in the New Zealand economy like those currently being experienced in parts of Europe. Such adjustments can reduce long-term growth prospects. Furthermore, large fluctuations in activity and employment have negative household income and social consequences, and therefore weigh on living standards. The Treasury looks to sovereign credit ratings as one indicator of this vulnerability, and in reference to a suite of other measures.

An improved sovereign credit rating will only be likely if New Zealand's export receipts increase significantly, if the net international liability position shows a sustained downward trend and/or if there was clear evidence that those liabilities were being used to fund investment that would support a significant lift in New Zealand's economic growth. Declining economic vulnerabilities would be diagnosed through a significant lift in gross national savings, which the Treasury tracks as a key indicator.

Providing the current generation with high-quality services is not sustainable if it raises the risk of future macroeconomic instability or if current spending must be financed by increased debt, taxes and reduced services (the Long-term Fiscal Statement tracks this). A sustainable balance of debt and spending on current and future services prevents inter-generational inequity or the risk of future instability.

Government's conduct of fiscal and other policies can also help maintain an economy with modest variability in GDP growth, low and stable inflation rates and with predictability in tax and spending(the Treasury tracks these as key indicators). These factors allow individuals and businesses to save and invest more effectively for the longer term. Higher and more productive investment is a key factor in achieving higher economic growth.

What will we do to achieve this outcome?

The Treasury's work aims to help Government to reduce the risk of an abrupt negative economic adjustment. Our work will provide advice to help government reduce variability in the typical business cycle(a key indicator) and the ensuing risk of sudden economic shocks by better avoiding pro-cyclical fiscal policy - especially exacerbating the peak of the economic cycle. We will review the Public Finance Act 1989 and undertake research to ensure that the contribution fiscal policy settings make to macroeconomic stability is fit for purpose, and in particular does not contribute inappropriately to economic imbalances and the business cycle. We will also continue to undertake economic and fiscal monitoring/reporting and forecasting, which are critical for identifying emerging risks that could undermine macroeconomic stability and sustainability and through our advice, support timely policy responses. We will also provide options to reduce the negative impacts on household savings behaviour of, e.g. welfare and retirement income settings.

The Treasury will advise the Minister of Finance regarding the impact of government policy on inflation, and as required on the most appropriate monetary policy framework, including his Policy Targets Agreement with the Reserve Bank, which influences the Bank's conduct and the resulting degree of price stability.

Refer to Measures section below to see how we assess the Treasury's contribution.

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

Net Core Crown Debt to Nominal GDP

Source: Treasury

New Zealand's net debt and its future fiscal position are driven by current and historical spending decisions. In the most recent Long-term Fiscal Statement (2009), the Treasury outlined the choices and trade-offs that will be needed to meet future cost and demand pressures. It showed that, without policy changes, especially in public spending, New Zealand's ageing population structure will make it increasingly harder to avoid significant fiscal deficits. Either debt will lift, or tax rises will be required to keep debt in check, leading to significant impacts on macro stability and growth whichever occurs. The Treasury will publish another Long-term Fiscal Statement in 2012/13. We will evaluate the extent to which spending is consistent with the long-term fiscal strategy. This will include advice on medium-term strategies for sectors with the highest levels of government spending – health, education, welfare and justice.

We will also advise on the wider economic impact of State sector spending, including its impact through taxes, on economic volatility and on inflation and inflation expectations. The Treasury will work to assist Ministers to bring the operating balance back to surplus as soon as possible (discussed in more detail on page 20, contributing to the outcome of a High-Performing State Sector that Supports New Zealand's International Competitiveness).

Refer to Measures section below to see how we assess the Treasury's contribution.

Intermediate outcome: The Crown's balance sheet is managed efficiently and effectively

The Crown's approach to effectively and efficiently managing its balance sheet revolves around rebuilding the Government's buffer against future shocks; reducing risk exposures; managing debt and non-debt liabilities to sustainable levels consistent with long-term fiscal solvency; and minimising borrowing costs subject to an acceptable level of risk.

Enhancing performance and containing risk across the Crown's assets and liabilities contributes to our high-level outcomes by assisting net debt objectives, reducing core Crown expenses and minimising negative impacts on the Crown's fiscal position arising from economic downturns and other events.

This intermediate outcome also contributes to a High-Performing State Sector that Supports New Zealand’s International Competitiveness and is discussed on page 21.

Refer to Measures section below to see how we assess the Treasury's contribution.