Parliament

Gordon Campbell | Parliament TV | Parliament Today | Video | Questions Of the Day | Search

 

Overview: December Economic and Fiscal Update

For a link to the Treasury version (including graphics)
see...
http://www.treasury.govt.nz/forecasts/defu/2000/summary/summary.asp

DEFU 2000 - Summary of the Treasury's Economic and Fiscal Forecasts

This summary sets out the economic and fiscal outlook for the next five years. Risks to the outlook may lead to a change in the growth path. Scenarios for higher and lower growth compared to the Central forecast illustrate this.

The Economic Outlook
Weak growth in the near term is followed by solid export-led expansion further out
The observed softening in business and consumer confidence, together with the generally weaker domestic activity over the first half of this year, suggest reasonably subdued growth in 2001. Annual average growth is expected to be 2.2% in the year to March 2001.

Growth peaks at 3.7% in 2002 reflecting a strong external sector contribution on the back of robust world growth and supportive monetary conditions. Thereafter, we expect a slowing in activity back to a growth rate of 2.8%, reflecting a softening in global growth and a modest tightening in monetary conditions.

NZ's main trading partners are expected to grow by 4.5% in calendar 2000, following an increase of 3.7% in 1999, before easing back to 3.5% growth in 2001. This sets the scene for strong growth in non-commodity manufactured goods and services exports over the forecast horizon. The recent decline in the exchange rate, together with robust international conditions, is expected to further assist commodity exporters.



This leads to a substantial improvement in the current account deficit, forecast to decrease steadily from 7.2% of GDP in June 2000 to a forecast 3.1% by March 2005.
Strong export growth, and a return in confidence due to the upturn in activity is also expected to lift investment over the calendar 2001 year, as deferred investment spending is implemented.

Modest tightening in the labour market with consumption remaining restrained
The labour market tightens modestly with the unemployment rate easing to 5.7% by the end of the forecast period. Higher participation rates are expected to offset much of the steady employment growth.

Household expenditure growth is expected to remain subdued over the short term due to high consumer debt levels, minimal wealth gains from weak housing market activity, modest employment growth and rising retail prices.

Short-term inflationary pressures continue to build but a modest tightening in monetary conditions keeps the economy on a sustainable growth path
Higher oil prices and rising import costs due to the weaker currency results in a build-up in short-term inflationary pressures. CPI inflation is expected to peak at 3.8% in June 2001. Over the forecast period, inflationary pressures emerging from a forecast rise in wages and firms' margins are tempered by a decline in oil prices and tightening monetary conditions.

A moderate tightening in monetary conditions is expected through a modest increase in interest rates to a peak of 7.25% and an appreciation in the TWI.

The Fiscal Outlook
The operating balance rises steadily over the forecast horizon
The forecast 2000/01 operating balance ($765 million or 0.7% of GDP) has declined from the previous year. This reflects both expense growth outstripping tax revenue growth in 2000/01, and the previous year's operating balance being boosted by a positive ACC liability revaluation.

Tax revenue grows at 5% in 2000/01 before peaking at around 7% in 2001/02, as nominal GDP growth peaks.

Expense growth at 5.4% in 2000/01 is the result of demand-driven factors, the implementation of the Government's policy programme (with the full impact of the decisions such as the increase in the NZS wage floor being felt) and the impact of GSF liability valuation movements. Expense growth slows in 2001/02 due to a smaller Budget 2001 package and the assumed reversal of the impact of GSF valuation movements.

From 2002/03, tax revenue growth averages around 5% each year. Expense growth slows to around 3% each year, reflecting smaller allowances for new policy initiatives.

The structural operating balance trend increases throughout the forecast horizon.

The surplus cash is applied to investments
The rising operating surplus generates just over $14 billion in cash over the forecast period for investing and debt repayment.

Investment claims more than account for these cash flows. These claims include building NZS Fund assets, purchase of physical assets and funding student loans.
As a result, gross debt rises slightly over the forecast period in nominal terms.

Net debt declines, both in nominal terms and as a percentage of GDP to 15.8% by 2004/05.

Operating balance forecasts have not changed substantially from the Budget
Changes to the operating balance are relatively small and driven mainly by the macroeconomic forecasts. The Government's policy settings have not been changed since the Budget Update.


The weaker economic forecast for 2000/01 results in reduced taxation revenue, which is recovered in later years.

Other factors impacting on the operating balance since the Budget Update include:

higher benefit forecasts, reflecting higher CPI forecasts
higher net finance costs from 2002/03 due to higher debt levels.
Gross debt increases from Budget forecast


Compared to the Budget Update, gross debt is higher on average.

The increase reflects:

advances to hospitals refinancing their private sector debt
the exchange rate depreciation
an increase to the capital provision.
Net debt ($ and % of GDP) is slightly higher on average in all years, compared to Budget forecasts. This reflects the increase to the capital provisions.

Risks and Scenarios
There are a number of risks surrounding the economic and fiscal forecasts. If events were to develop differently from those embodied in the Central Forecast, then the GDP growth path that emerges could look quite different. This, in turn, would lead to different fiscal outcomes, because differences in the outlook for the economy alter the outlook for tax revenue and expenditure.

An example of a downside risk is the possibility of confidence remaining weak for a more prolonged period of time - with this feeding into economic activity - combined with world growth slowing more sharply than assumed.

Conversely, the recovery in economic activity could be faster and stronger, as the export stimulus flows more quickly into the rest of the economy. This could occur in conjunction with more muted second-round effects following the current inflation spike. Furthermore, the economy could exhibit stronger labour productivity growth during the upswing of the economic cycle.

The impact on the operating balance of these scenarios is shown in the table below.

Table 1 - Alternative scenarios: Operating balance
Operating Balance
($ billion, June years) 1999/00
Actual 2000/01
Forecast 2001/02
Forecast 2002/03
Forecast 2003/04
Forecast 2004/05
Forecast
Central Forecast 1.4 0.8 2.2 2.8 3.6 4.5
Weaker Domestic Demand and World Growth 1.4 0.5 1.7 1.5 2.3 3.8
Stronger Economic Recovery 1.4 1.2 3.3 4.0 4.7 5.4

Sources: Statistics New Zealand, The Treasury

© Scoop Media

 
 
 
Parliament Headlines | Politics Headlines | Regional Headlines

 

Discussion Doc: National's Primary Sector Plans

Today National has released our third discussion document, this one on the primary sector. It showcases our positive and innovative approach to what is the backbone of our economy, Leader of the National Party Simon Bridges says. More>>

ALSO:

Govt Adopts Working Group Plan: Unions Welcome Film Industry Collective Bargaining

The announcement today by the Minister for Workplace Relations and Safety Iain Lees-Galloway, to support collective bargaining for those working in the film and screen industry, is welcomed. More>>

ALSO:

Greenpeace: New Oil Rig Arrives

A drill rig commissioned by oil giant OMV has arrived in New Zealand, a little over a year after the Government issued a ban on new oil and gas exploration permits... More>>

ALSO:

Proactive Non-Release: Housing Minister Says Unpublished Meeting 'Not A Secret'

Housing Minister Phil Twyford says an error from his office meant a meeting with another minister and the Auckland mayor was not included in his publicly released diaries. More>>

ALSO:

'Signalling Urgency': Auckland Council Declares Climate Emergency

“By unanimously voting to declare a climate emergency we are signalling the council’s intention to put climate change at the front and centre of our decision making,” says Mayor Phil Goff. More>>

ALSO:

Potential Disasters: Insurance Taskforce To Deal With Skyrocketing Premiums

Wellington Mayor Justin Lester said the group would look at how the insurance market was functioning amid massive premium increases, which have also led to claims the market is broken. More>>

ALSO:

 
 
 
 
 

LATEST HEADLINES

  • PARLIAMENT
  • POLITICS
  • REGIONAL
 
 

InfoPages News Channels