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Outcome: A Stable and Sustainable Macroeconomic Environment

What are we seeking to achieve?

A stable macroeconomic environment is a fundamental precursor for strong, sustained economic growth and higher living standards. A stable and sustainable macroeconomic environment provides a degree of predictability and certainty for households and firms which helps them to make decisions with respect to employment, saving, investing, innovating and grasping opportunities. The events of the past few years underline that macroeconomic stability cannot be taken for granted. Excessive real GDP and inflation variability hurt decision-making, leading to lower average growth.

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. High government deficits and external debt can hurt economic stability, raise the impact of external crises (as measured by credit ratings) and push up real interest rates and borrowing costs. A stable macroeconomic environment is consistent with achieving a reasonably low degree of variability in GDP growth.

Price stability, defined as low and stable inflation and inflation expectations, is another element of macroeconomic stability. High and unexpected inflation is costly for the economy as it creates uncertainty and disrupts decision-making. It lowers people's living standards by undermining the value of their purchasing power. Price stability is the responsibility of monetary policy, but achieving it in an efficient manner is supported by other factors such as fiscal policy, competition and market structures.

A long-standing imbalance between national saving and investment has been identified as a contributor to macroeconomic vulnerability. Increasing national saving is consistent with reducing external imbalances whilst underpinning growth-enhancing investment. Lifting national saving will reduce pressure on interest rates and the exchange rate, and support growth in the more productive tradable sector. The Government can play a role in lifting national savings through its fiscal strategy and other policy settings.

A sustainable fiscal outlook contributes to macroeconomic stability. Government spending is always ultimately financed by increased taxation, whether now or in the future. Managing current and future spending pressures is important for growth, intergenerational fairness and ensuring that fiscal policy has the flexibility to deal with adverse shocks.

There are a large number of factors that influence the achievement of a stable and sustainable macroeconomic environment. The Treasury has a particular role in providing advice on how to achieve a stable macroeconomic environment and how to achieve a sustainable fiscal position. These are outlined in more detail below.

How we will assess whether we are achieving A Stable and Sustainable Macroeconomic Environment
Indicator Current performance Target
Reduced concerns about New Zealand's external vulnerabilities as reflected in New Zealand's sovereign credit rating. Two of the three major rating agencies have assigned New Zealand an AA rating on its external sovereign debt. The other (Moody's) still has New Zealand as AAA. By 2015/16 two out of the three major rating agencies increase New Zealand's credit rating to AAA with stable outlook.
Inflation and inflation expectations.

Annual Consumer Price Index (CPI) inflation was 1.6% in the year to March 2012, taking the five-year average to 2.9%.

Two-year ahead inflation expectations were 2.5% in the March 2012 quarter, the lowest since the September 2009 quarter and down from a 3% peak in the June 2011 quarter. 

These remain anchored within 1% to 3%.

Rolling five-year average of inflation outturns remains in the target band, and no higher than the average for the past decade.

Gross national saving rate increases. National saving as a share of GDP was14.9% and 15.3% in the year and 5 years to March 2011 respectively. Trending toward 25% of GDP over the next five years and remains elevated.
Improved fiscal outlook. The operating balance before gains and losses (OBEGAL) has been in deficit each year since 2008/09 and core Crown net debt has increased from a low of 5.6% of GDP in June 2008 to an estimated 25% in June 2012.

By 2014/15 the fiscal position has moved into balance or surplus and net debt has peaked and begun declining.

Indicators of long-term fiscal sustainability show improvement in the 2013 and subsequent long-term fiscal statements.

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