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Briefing to the Incoming Minister of Finance 2008: Medium-term Economic Challenges

Executive Summary

This briefing discusses New Zealand’s medium-term economic outlook. In the immediate future, international economic conditions will be dominated by events in the financial sector and their aftermath. The full impact of this instability on the real economy remains uncertain. We have prepared updated forecasts and advice on how you might respond to the current downturn. While the immediate circumstances will test us, New Zealand’s success will be measured by how we use the opportunities they present to lift our medium-term economic performance and to raise New Zealand’s living standards as better economic conditions emerge.

Business Productivity and Income Levels

New Zealanders aspire to have living standards among the best in the world. Achieving this aspiration will require long-term commitment to raising our incomes and improving economic growth. The key to achieving this is higher productivity growth. Our businesses are operating in a rapidly changing world, which will affect their ability to increase productivity. These changes will also raise new challenges for the Government in developing policy and managing the public sector. Significant trends include:

  • globalisation
  • international integration
  • technology change
  • natural resources pressures
  • demographic changes and increasing expectations on the state.

Taken together, these trends will create a very different economic environment in the medium term. New Zealand's economic growth depends on how well our businesses can adapt to the new world. The challenge for the Government is how well it can anticipate and respond to these challenges, and create an environment where businesses can take advantage of the opportunities. A strategy that relies on marginal adjustment to current policies over time is unlikely to address the significant challenges New Zealand faces.

Policy Directions for Growth

In light of these trends, our assessment is that the following broad directions would help to achieve higher productivity and improve living standards:

  • maintaining a stable economic environment that supports economic adjustment
  • making New Zealand more connected to the world economy
  • creating a business environment that encourages enterprise and investment
  • increasing the contribution from skills to productivity and opportunity
  • improving the management of natural resources
  • enhancing the effectiveness and efficiency of the public sector
  • making progress towards a sustainable fiscal position.

The Treasury's advice on policy direction in each area is identified below. These policy directions are deliberately medium term but not without urgency, particularly where decisions made now will affect the economic performance for years to come. The contribution they make to productivity is discussed in the body of the report.

Maintaining Economic Stability

  • Past macroeconomic policies have put New Zealand in a reasonably strong position to weather economic shocks.
  • Significant fiscal stimulus is already in train, and tax and spending should be allowed to adjust as the economy slows. In the medium-term, fiscal consolidation will be needed.
  • Temporary government guarantees should maintain confidence in the financial system, but our frameworks for financial stability will require strengthening.
  • Some of the structural policies identified below aim to improve economic growth, but should also help prevent the build-up of vulnerabilities in future economic cycles.

Making New Zealand More Connected to the World Economy

  • Pursue a long-term agenda to make New Zealand an integral part of the developing Asia-Pacific regional economic market.
  • Reduce remaining barriers at the border to inward investment and trade.
  • Maintain momentum on improving market access through multilateral, plurilateral and bilateral forums.
  • Ensure domestic policy settings facilitate strong international links and make New Zealand an attractive environment to work, invest and do business.
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