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Opening Statement Delivered to the Finance & Expenditure Select Committee

Published 16 Feb 2016

Opening statement delivered to the Finance & Expenditure Select Committee by the Secretary to the Treasury, Gabriel Makhlouf, 16 February 2016.

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The speech is available in Adobe PDF and HTML formats. Using PDF Files

I’d like to begin with some brief comments on developments since the Treasury’s Half Year Economic and Fiscal Update was published in December.

Starting with fiscal matters, the Crown’s accounts are generally tracking along in line with HYEFU expectations. The latest Financial Statements of the Government released last month showed net debt at $63.5 billion (26 per cent of GDP) and core Crown expenses at $30.5 billion, both close to forecast.

While revenue was a little behind where we thought it would be, we know fluctuations from month to month are par for the course and they are expected to even out over time.

In short, we’re not seeing any fiscal issues that would change our views from HYEFU right now. We’ll be putting out our next official forecasts in Budget 2016.

Turning to the economy, the start of the year has had plenty to offer both pessimists and optimists alike.

Dairy prices have weakened over January and February, with whole milk powder falling 10.4 percent at the latest GlobalDairyTrade auction. Fonterra has dropped its farm gate milk price forecast to $4.15 per kilogram of milk solids. And while January saw good rainfall across most of the country, drought remains a significant risk.

We have also seen projections for global economic growth pegged back a bit. The IMF’s most recent World Economic Outlook Update picks growth in advanced economies to be 2.1 percent both this year and next. There are concerns about financial market volatility, falling oil and commodity prices, and simmering geopolitical tensions. Low inflation, as we have here in New Zealand, is also being experienced in many other advanced economies around the world.

Worries about the slowdown in China’s economic growth have been exacerbated because the European Union and Japan have been flat and the US and UK economic recoveries are still relatively muted. I think the worry about China’s growth could be overstated. The slowdown is predictable – in fact it’s in line with the Chinese government’s strategy to rebalance its economy from investment to consumption. I’ve recently returned from Hong Kong and China, where the people I spoke to are not expecting a hard landing.

I should add that it’s also unhelpful to think of China as a single economic entity. It is more like the European Union, made up of multiple economies at different stages of development and growth. The impact of China’s slowdown really depends on what you are selling and where in China you are selling it.

Let’s not forget New Zealand’s economy is more than one industry and one market. Tourism is doing well, with international visitors spending $11.8 billion in New Zealand in the year ended March 2015, up $1.7 billion from the year before. Construction is doing well, as new dwelling consents were up 21 per cent in Auckland in 2015, non-residential building consents grew 27 per cent in Canterbury, and the latest Occupation Outlook from MBIE shows strong prospects for those planning a career in construction and infrastructure.

Horticulture export revenues are forecast to rise 16 per cent to $4.8 billion by June this year; beef export revenue rose 14 per cent last quarter compared to the previous year; wine exports reached a record $1.54 billion in 2015; and ICT exports have grown at 14 per cent per annum over the last six years; so all these sectors are doing well.  

Export education is doing well too. There were 27,900 people who came to New Zealand on student visas last year, almost a quarter of all of our migrant arrivals.

Our diversified economy delivered higher GDP growth in the second half of 2015 than we expected in HYEFU and may push growth in 2016 up to around 2.5 percent – again, higher than forecast in HYEFU. Sure, the economy isn’t sprinting ahead – no one’s is – but nor is it crawling along either.

Business surveys pointed to sustained activity levels and a rebound in business confidence in the December quarter. And while business confidence is holding up, the latest unemployment rate has come down. Unemployment has dropped to 5.3 percent, the lowest rate for almost seven years. Labour market statistics also show the proportion of 15 to 24-year-olds not in education, employment or training has fallen to 10.9 percent, the best result since September 2008. And for 15 to 19-year-olds the results were the lowest on record at 6.5 percent.

I’ll finish on that note and close my comments there. Thank you.

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