What will we do to achieve this outcome?
Intermediate outcome: A stable macroeconomic environment
Large fluctuations in activity and employment (as measured by GDP variability) have negative household income and social consequences, and therefore weigh on living standards. Over the 10 years to 2010 New Zealand had the 13th lowest GDP variability amongst OECD countries. This is better than our performance in the prior decade and one we should seek to maintain. Avoiding recessions is an important component of achieving higher living standards over time, as output lost during recessions is not always fully recovered. History shows New Zealand's level of GDP per capita has fallen behind that of Australia mainly at times of recession here, and this gap is not usually closed during economic booms.
An important indicator of New Zealand's macroeconomic vulnerability, New Zealand's net international investment position, was at a level in 2008 that was comparable with many of the countries that have since suffered severe economic crises, as markets came to doubt their ongoing solvency. New Zealand's net international position was cited as a reason by ratings agencies for New Zealand's recent credit downgrades. If market perceptions of the risks associated with New Zealand were to deteriorate significantly, the consequences could be severe, as currently evidenced by developments in some European countries.
Returning to surplus and rebuilding fiscal buffers by lowering government expenditure relative to GDP is the most direct and immediate contribution that the Government can make to reducing New Zealand's macroeconomic vulnerabilities. It also supports higher growth through a better allocation of resources across the economy. Reducing the fiscal deficit and returning to surplus will directly act to increase national saving and reduce the Government's contribution to the net external debt position. Returning government net debt to a prudent level could also improve macroeconomic stability by ensuring the Government has the option to let automatic fiscal stabilisers operate to help cushion the economy in the event of a future negative shock.
In addition to higher government saving, a number of policy changes would help achieve a lift in overall national saving relative to investment sufficient to arrest and reverse further deterioration in New Zealand's net external liability. Over the period of this Statement of Intent, the Treasury will undertake research and provide advice on a comprehensive policy prescription (across tax, government spending, welfare, retirement income policies, saving and investment policy) to help raise national saving.
The Treasury's work aims to help the Government to reduce the risk of an abrupt negative economic adjustment through our macroeconomic monitoring and associated policy advice; and our fiscal strategy, policy and frameworks advice. Our work will provide advice to help government reduce variability in the typical business cycle and manage the impact of sudden economic shocks by being more careful to avoid pro-cyclical fiscal policy - especially during the upside of the economic cycle.
We will support the Government to amend of the Public Finance Act 1989 to ensure the fiscal responsibility principles help reduce future cyclical rises in interest and exchange rates. We will provide advice to ensure that fiscal policy settings support macroeconomic stability, and in particular do not contribute to economic imbalances and exacerbate the business cycle.
The Treasury will provide advice on improving the resilience of the wider financial system in order to reduce the macroeconomic risks associated with potential future financial shocks.
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.
The Treasury will advise the Minister of Finance as required on the monetary policy framework, including his Policy Targets Agreement with RBNZ.
Refer to Measures section below to see how we assess the Treasury's contribution.
