Treasury Secretary’s Opening Statement to Finance and Expenditure Select Committee, 13 February 2013

Opening statement to Parliament’s Finance and Expenditure Select Committee delivered by Secretary to the Treasury Gabriel Makhlouf, 13 February 2013.

Good morning. I am pleased to present the Treasury's Half Year Economic and Fiscal Update (or HYEFU) to the committee. I would like to briefly recap key aspects of HYEFU and note some developments since it was finalised in December.

Economic update#

The New Zealand economy has experienced a slow and uneven recovery from the 2008/09 recession. This is in keeping with many other advanced economies, and reflects a range of factors, including:

  • Slower growth in the global economy since the financial crisis, with associated impacts on funding costs and the exchange rate;
  • Changes in household and firm behaviour following the build-up of debt over the mid-2000s;
  • The Canterbury earthquakes and their impact on sentiment and activity.

Nevertheless, economic growth rose to 2.5% in the year to September 2012 and is forecast to remain at around this level, on average, over the next five years. This is down from around 3% in the 2012 Budget Update.


We expect the Canterbury rebuild to be a key driver of New Zealand's economic growth over the next two years.

Information compiled by the Canterbury Earthquake Recovery Authority led us to revise up our estimates of damage caused by the Canterbury earthquakes in the half year update. The amount of fixed capital investment stemming from the Canterbury rebuild may be around $30bn. A significant contribution to financing the rebuild comes from the Crown, with the latest estimate of the cost being $13.1bn.

While there are still uncertainties about the scale and timing of the rebuild, overall just over half of the total expected rebuild cost is factored into the HYEFU forecasts, which cover the period out to June 2017.  This includes all of the required investment in infrastructure, most residential rebuild activity, and around $3bn of commercial or social investment.

Other key features#

Other key features of the economic outlook include:

  • Low CPI inflation. Annual inflation was only 0.9% in the December 2012 quarter. The outlook for inflation has also moderated since the Budget Update due to factors such as the exchange rate and falling imported commodity prices, although we do expect inflation to rise as these influences fade and the economic recovery continues;
  • External factors, particularly the weak economic outlook for advanced economies, means the exchange rate is assumed to remain close to its current level over the current year and into 2014, impacting on growth in the tradeable sector;
  • Employment is expected to rise as the Canterbury rebuild and improving business confidence increase demand for labour. We see employment rising by 1.9% in the March 2015 year – its fastest annual growth rate since the March 2007 year. Unemployment is expected to drop to just below 5% in the June 2017 quarter;
  • The Canterbury rebuild is set to boost investment in housing. Once in full swing, the residential rebuild comprises over 15% of total real residential investment. Residential investment activity in the rest of the country is expected to increase over time as pent-up demand in some regions comes through;
  • The current account deficit is expected to rise from 4.7% of GDP now to 6.5% in the year to March 2017. Part of this rise reflects the investment activity related to the rebuilding of Canterbury.

In forming a view of the likely growth of the economy we have considered the underlying supply capacity, known as potential output.  While we are expecting economic growth to continue, our downward revision to the average rate of growth in HYEFU largely reflects a judgement that the underlying growth rate of the economy will be slower for longer.

Fiscal forecasts#

In the fiscal forecasts for HYEFU, a surplus of $66m is expected in 2014/15.

The weaker economic and inflation outlook has resulted in $2.1bn lower tax revenue expected in 2014/15 relative to what was in the Budget Update, but also $0.8bn lower expenses on benefits, financing costs and GSF expenses in that year.

Other changes, including policy changes, timing differences and tax forecasting, also provided an offset (totaling around $1.2bn) to the OBEGAL in 2014/15 relative to what was in the Budget Update.

Net core Crown debt is expected to continue rising from 24.3% of GDP in 2011/12 to a peak of 29.5% of GDP in 2014/15 and 2015/16 before falling slightly in the final year of the forecasts.

Subsequent activity#

By way of a brief update since HYEFU:

  • Revised GDP data for mid-2012 indicates that growth was weaker than we expected, but the run of recent data is pointing to a pick-up in December.  Reports and data relating to Canterbury indicate that the rebuild is gaining momentum, and businesses seem more upbeat. The latest tax revenue outcomes, for the five months ending November, were largely as we expected;
  • Global market sentiment has improved significantly in the New Year, driven by the US avoiding its fiscal cliff and a pick-up in macroeconomic data, particularly in Asia. Global equity markets are at five-year highs. However, while sentiment has improved, global growth in 2013 is still expected to be slightly below trend;
  • The New Zealand dollar continued to appreciate in the New Year. Again this is largely the product of external factors. In a difficult global environment, international investors have taken an increasing interest in countries with a favourable growth outlook, sound and stable institutions, including fiscal and monetary policy, and higher interest rates.  For New Zealand, the high dollar is a drag on export growth but also helps to keep inflation low.  It has also helped to keep down the cost of some capital imports, including those employed in the Canterbury rebuild, and has helped keep other import costs low, such as fertilisers and fuel.  It has lowered the price of consumer goods, including cars and electronic goods.
  • The latest employment figures for the December quarter have employment, unemployment and labour force participation all dropping.  It's been acknowledged that the Household Labour Force Survey can sometimes produce surprising results, and last week's report is at odds with other indicators of the labour market, such as the various employment confidence measures, which were flat or improved in the quarter, as well as PAYE which has held up well of late. Wages continue to grow moderately, filled jobs are higher and labour input is up. We think the medium-term outlook for employment is more positive than the survey suggests. Factors supporting employment growth include increased activity in Canterbury, low interest rates, and solid ongoing demand and higher prices for our commodity exports. 

Of course there are uncertainties in any forecast, and the HYEFU reflects our best assessment of the situation based on the data available at the time. The risks are still skewed to the downside, but they have become less extreme. For now, it's fair to say that developments over the last few months are generally consistent with what we expected.


In summary, our HYEFU forecasts for economic growth were lower than our forecasts made at the time of the Budget in May. This period also saw other forecasting institutions such as the IMF, the OECD and the Reserve Bank revise down their forecasts, in light of factors such as the weaker global recovery.  Overall, the Treasury's forecasts are consistent with the consensus on average growth rates.

New Zealand's gradual economic recovery is forecast to continue but it's a bit slower than we previously thought.  And while the global environment continues to present challenges, we need to continue to seize the opportunities to give ourselves the best chance of success: by pursuing policies that strike the right balance between limiting debt and supporting economic growth; by ensuring efficient markets and remaining among the best places in the world to do business; and by maintaining the strength of our institutions and our standards of transparency.  We at the Treasury are proud to see New Zealand's No 1 rating for budget transparency and accountability.  Keeping the door of opportunity open and inspiring high levels of trust and confidence are important for encouraging growth at a time when every country's economic and fiscal performance is being closely scrutinised.