The New Zealand Economy: Outlook and Policy Challenges

Secretary to the Treasury John Whitehead recently addressed the chairs of approximately 40 New Zealand companies and organisations at the Institute of Directors’ 2009 Company Chairman’s Workshop on 25 September 2009.  His presentation outlined the Treasury’s thinking on the current economic situation and the challenges facing New Zealand.

The presentation is summarised below.

Summary

While we are now out of the longest recession New Zealand has faced since the 1970s, the recovery will be fragile and there are still risks to the outlook.  Most developed countries have experienced recession and still face rising unemployment and growing public debt. Unemployment in New Zealand will also get worse, even though the economy has begun to grow.

The New Zealand dollar exchange rate dropped sharply after the financial market turmoil and this was an important buffer for our economy during the financial crisis.  Now that the worst of the crisis has passed the New Zealand dollar has rebounded.  However, there are signs that the emerging economic recovery will be unbalanced, driven by consumer spending and investment in unproductive assets.  We need a switch in demand from the non-tradable sector to exports.

New Zealand faces two very important challenges, 1) accelerating productivity growth and 2) reducing our vulnerabilities by adopting policies that encourage unwinding of our economic imbalances. The good news is that the policies to address these challenges are largely complementary. We’ve got a couple of choices.  Choice one is the status quo: keeping on the course we’re going, which will mean a slow relative decline.  Our second choice, the better choice, is to pursue a much higher rate of real growth. 

The size of the challenges we face suggests that bold policies are needed, with the goal of moving the economy onto a higher and more sustainable growth path.  But there are some significant barriers to such policy reform, with discussion often focused too much on the short-term costs of reform while the long-term benefits receive short-shrift.  While some people may believe that the government accounts are under control, the tough spending decisions have not yet been made. There are also tough decisions to make about how tax reform and structural policy reform can best improve incentives to raise growth and reduce vulnerabilities

There is an urgent need to shift the debate, to make the choices that we face very clear.  Political leaders can’t do this alone; business leaders, public servants and others must also play an important role – and the longer we leave it, the harder it will get.  Your support in helping to frame the debate and argue the case for bold change will be essential.