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Statement of Intent 2014-2019

Outcome: A Stable and Sustainable Macroeconomic Environment

A stable macroeconomic environment is important to achieving long-run economic growth and higher living standards. We also need to ensure that the New Zealand economy is not significantly impacted by the economic or financial troubles other countries experience (reducing our macroeconomic vulnerability) and that the actions of today do not impose undue costs on our economy in the future (sustainability).

Volatility in New Zealand's activity and employment (as measured by GDP variability) and inflation levels hurts decision-making with respect to employment, saving, investing, innovating and grasping opportunities. It lowers people's living standards by undermining the value of their purchasing power. Output lost during recessions is not always fully recovered causing us to fall further behind other OECD countries.

While there are many factors that impact on the macroeconomic environment, key factors within government's purview include the overall design of the macroeconomic framework, fiscal policy and structure of the Crown's balance sheet, and regulation governing the operation of product, capital and labour markets. The latter can sometimes act to amplify or dampen economic cycles, and economic and financial risks in the economy.

High government deficits and external debt can hurt economic stability, raise the negative impact of external crises, and push up real interest rates and borrowing costs. In addition, high levels of fiscal expenditure when the economy is strong (pro-cyclical fiscal stimulus) can exacerbate the interest rate and exchange rate cycles.

Government spending is always ultimately financed by 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 lessons to be learnt from the previous economic expansion and the global financial crisis. Ensuring we have the right financial stability tools in place, and that we use them appropriately, is important to prevent future financial crises. Some of these tools also have the potential to help smooth cyclical fluctuations in economic activity. Efficient capital and financial markets are important to help the economy react smoothly and adjust to shocks, and to ensure that firms, households and government are able to maximise the benefits from saving and fund investment.

The coming economic cycle is likely to test economic management again. The Canterbury rebuild will require significant resources. Demand for housing remains strong. The strength in domestic demand is likely at the margin to crowd-out activity in the traded sector. Over the next few years the Treasury is focused on managing the consequences for medium-term growth from the current cycle.

Why worry about house prices?

The relationship between housing markets and macroeconomic pressures is complex. Improvements in the functioning of housing markets may reduce pressures on interest rates, the exchange rate and the tradable sector. High and variable house prices can pose risks to financial stability with wider consequences for economic activity.

Improvements in the availability and cost of housing would also have direct benefits to households. Access to affordable housing also makes an important contribution to wider living standards and is essential to meet basic needs.

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