C Implications for New Zealand's Economic Outlook and Policy Priorities

Global risks highlight the need for significant adjustment to manage risks and build resilience ...

The Treasury's forecasts for the New Zealand economy, included in the PREFU, are for real GDP per capita growth of 2.0 per cent on average over the five years to March 2016. This growth is expected to be underpinned by earthquake-related rebuilding in Canterbury and a high terms of trade, which together support growth in domestic demand. The potential for ongoing global economic and financial market instability is the key risk to this economic outlook. Global shocks could have negative consequences for export demand and commodity prices, and, potentially more gravely, could lead to greater financial market sensitivity to our net external liability position. A negative change in financial market sentiment towards New Zealand could have very significant effects on the availability and price of credit, and on real economic activity and employment. These risks highlight the importance of policies to assist in increasing economic resilience. Returning the fiscal balance to surplus and reducing government net debt is a central part of increasing resilience and will necessarily involve expenditure reprioritisation in some areas. But other policies will also be needed to encourage a sharper lift in national saving relative to investment, and to arrest the projected increase in New Zealand's net external liability position.

... while a focus on lifting productivity and international competitiveness is required to restore parity with high-income nations

Higher national saving relative to investment would help to improve international competitiveness by reducing upward pressure on interest rates (and thereby on the cost of capital) and on the real exchange rate. Reducing upward pressure on the exchange rate from domestic sources is likely to be particularly important in the future, given strong commodity prices will act to keep the exchange rate high.

Policies to increase national saving and reduce macroeconomic imbalances will provide a foundation for improving economic performance. However, materially narrowing the income gap with more advanced countries, of around 30 to 40 per cent (figure 11), will also require wider policy reform to lift average GDP per capita growth over the medium term. In an increasingly globalised world, improving our international competitiveness is vital. Policy changes are needed to increase incentives to invest and conduct business in New Zealand, raise the productivity performance of firms operating here, minimise the cost pressures they face, and maintain their ability to adjust to changing circumstances. This would entail a wide and ambitious programme of reform across government policies relating to education, welfare, tax, regulation, science and innovation, infrastructure, and the management of natural resources.

Figure 11: GDP per capita as proportion of OECD mean; 1970 - 2010

Source: OECD

The rest of this briefing outlines specific policy priorities to achieve greater resilience and increased trend economic growth.