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1 Foreword

This briefing comes at a time of substantial uncertainty in the global economic environment. Since the economic forecasts included in the Treasury's pre-election economic and fiscal update (PREFU) were finalised in late September, the euro-area's sovereign debt crisis has intensified, prompting further efforts by policy-makers to calm markets, as illustrated by the European Union Summit on December 9.

Financial markets are displaying significant volatility and heightened risk aversion and uncertainty. This reflects ongoing concern over the sustainability of public debt (in Europe and the US), increased worries over the health of the European banking sector and a weakening in the outlook in many, particularly advanced, economies. Forecasts of global growth are being revised down and we are looking carefully at the outlook for New Zealand's key trading partners. But it is the prospect of volatile and more expensive credit markets and the impact of lower global growth on commodity prices where the greatest risks lie. Developments in these areas are extremely difficult to predict. At this stage we estimate global developments could reduce our forecast of New Zealand real GDP growth in year to March 2013 to around 3 percent, about ½ percent lower than in the PREFU. Our next official forecasts will be released in Budget 2012.

The turbulence in the markets represents a continuation of the 2008 financial crisis and the underlying problems are unlikely to be resolved in the near future. Although New Zealand has so far avoided a severe economic shock, growth has been weak for some time and our large fiscal deficit and high level of external indebtedness continue to expose the economy to risks. The slowdown in growth has also revealed that the current overall cost of government programmes is too high.

Maintaining and improving living standards for all New Zealanders requires policy changes to build economic resilience, to lift trend growth and to capture the enormous economic opportunities created by the ongoing rise of the Asian economies.

The following briefing (finalised 25 November) provides you with a short summary of the Treasury's advice on the key policy changes that in our view would substantially increase both resilience and trend economic growth. It is an ambitious and challenging programme of reforms aimed at improving the living standards of all New Zealanders. We are ready to discuss each of these policies with you, as well as your priorities in the coming weeks.


Gabriel Makhlouf
Secretary to the Treasury

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