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Executive Summary

The Treasury’s role is to provide advice that contributes to improved economic performance and higher living standards. This briefing focuses on those issues we consider most important for economic growth.

Economic performance is not all that matters. Social cohesion and the quality of the environment are also important for overall living standards. Balancing potentially competing objectives is not easy, nor does it necessarily require trade-offs. For example, growth helps social cohesion by providing increased opportunities for labour market participation, whilst social inclusion assists growth by making the most of skills, talent and endeavour.

As chapter one outlines, growth rates have increased and the issue is now one of how to sustain and bolster current growth. Our forecasts suggest that New Zealand will continue to experience reasonable rates of economic growth, although probably not sufficient to shift the country into the top half of the OECD within the next decade.

Many factors, working together, provide an environment for economic growth and national wellbeing. Shifts in international trading patterns, pressures on infrastructure development and natural resources, and continuing skill and labour shortages will all have an impact on the rate at which New Zealand’s economy can continue to grow.

Three challenges we see are:

Enhancing productivity growth: Sustaining and increasing economic growth will require an emphasis on policies that assist the transition from labour-absorbing growth to productivity-enhancing growth. The challenge, now, is to ensure that policy settings support a focus on increasing labour productivity right across the economy. Factors necessary to support this shift are:

  • strong external linkages (focusing on improving externally oriented policies, the World Trade Organisation, trade in the Asia-Pacific region and our relationship with Australia)
  • a sound business environment (focusing on natural resource management/climate change, infrastructure, innovation and tax), and
  • skill development and labour markets (especially tertiary education, work-based skills and further lifting labour participation).

Maintaining fiscal stability: Maintaining a robust macroeconomic environment provides a stable base for economic growth. New Zealand has a sound macroeconomic framework and the current fiscal position is strong. Challenges are emerging, however, in both the short and long term:

  • The current account deficit is high and private savings are low, leading to the risk of a sharp and uncomfortable economic adjustment.
  • In the long term, demographic pressures and rising public expectations will place demands on government expenditure and associated social policy settings.
  • Future Budgets must involve less new spending than in recent years to stabilise the size of government expenditure in the economy and to free up resources for growth-promoting initiatives. Freeing up resources will require difficult choices, informed by the incoming government’s priorities.

Our analysis of fiscal trends is based on the information provided in the Pre-election Economic and Fiscal Update (Pre-EFU). Our assessments will need to be revisited in the context of the policy undertakings promoted by the new government.

Lifting the performance of the state sector: The performance of the wider public sector needs to be lifted to meet the expectations of Ministers and the public, ensure value for money of current spending and provide a direct contribution to lifting overall productivity in the economy.

Responses need to focus on changing incentives, as well as the behaviours and culture throughout the public sector. This means using current policy tools rather than introducing new ones and using public and ministerial expectations to drive public sector performance. Priority areas are:

  • achieving better policy coherence and a longer-term view
  • better use of performance information
  • using the Budget process to boost performance
  • improving central agency support for Ministers, and
  • focusing attention on Crown entities.

This briefing reflects the Treasury’s best advice on what we see as priorities for you and your colleagues over the next few years. Inevitably, the incoming government will have policies of its own that it will wish to progress. Our ongoing advice will be developed to support the new government achieve its objectives.

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