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New Zealand economy proves resilient

Hon Dr Michael Cullen 19/12/2006

New Zealand economy proves resilient

The New Zealand economy has been more resilient than expected at Budget time with the expected downturn proving to be much milder, said Finance Minister Michael Cullen today.

Dr Cullen was commenting on the release of theBudget Policy Statement
and the 2006 Half Year Economic and Fiscal Update.

"The economy is fundamentally sound and growth is being maintained at a solid pace," said Dr Cullen. "After the strongest period of expansion we have seen in 30 years, the economy is taking a bit of breather, but the doomsayers who forecast recession have been proved wrong.

"Treasury has revised upwards its Budget forecast of growth in the March year to 1.8 per cent, up from 1 per cent in May, thanks to continued strength in the labour market, domestic spending and favourable commodity prices.

"Treasury now expects the rebound from the cyclical downturn to be smoother with tighter monetary policy and the recent appreciation of the dollar slowing the return of the economy to 3 per cent annual growth until 2009.

"The economy is clearly in good heart. Businesses are becoming more confident about the level of their own activity and the tight labour market suggests businesses are holding on to staff in anticipation of a recovery. Indeed, Treasury forecasts a considerable lift in labour productivity over the next two years. This is essential if we are to enjoy a higher sustainable level of economic growth in the future.

"However, there are still serious imbalances in the economy resulting from the strong growth with inflation pressures and a large current account deficit. These are expected to unwind gradually over the next few years as domestic demand slows and rebalancing towards exports continues.

"Our robust fiscal profile and continuing prudent management remains a counter to any risks posed by the deficit. This year the government became a net saver. As Standard & Poor's has noted in its annual country review, 'low public sector debt and strong fiscal discipline' are significant counterpoints to the deficit.

"Indeed, the strong fiscal position has positioned New Zealand well for the future. The Labour-led government has been focused on the long term. We have tackled the challenge of superannuation by establishing the New Zealand Superannuation Fund and introducing KiwiSaver. Our progress has made New Zealand one of the best-prepared economies in the world to face the challenges of an ageing population. However, significant long-term challenges remain especially with the rising cost of health provision.

"Fortunately, our fiscal position continues to improve. We are in an even stronger position than at Budget time thanks to the continued strength in the economy and the building blocks put in place by this government.

"Higher than expected economic growth has boosted tax revenue and a stronger labour market has reduced benefit payments.

"As a result, the OBERAC is now forecast to be $6.5 billion in the current year, declining to $6 billion by 2010/11, a slightly higher track than at Budget time.

"Higher tax revenue and an upward revision to tax forecasts mean the cash deficits forecast in the Budget over the next four years have almost halved in total from $7.4 billion to $3.8 billion.

"The improved position means we will have around $1 billion of extra headroom available for Budget 2008 on top of the $2 billion allowance that was set in Budget 2006.

"However, I am mindful that there are significant inflationary pressures in the economy currently. The hallmark of this government has been prudent fiscal management and fiscal policy must continue to support monetary policy.

"Budget 2007 will reinforce our efforts to drive greater productivity and innovation as part of our strategy to transform the economy. The improved fiscal position will allow the introduction of a significant business tax package to take effect from 1 April 2008 and improves our ability to tackle other priorities such as climate change.

"Budget 2007 will also continue our progress in building a unique national identity and meeting the aspirations of families, young and old, to be healthier and more secure through initiatives to enhance our world class education, healthcare and social services.

"Our careful husbandry of the fiscal purse has put New Zealand in an enviable position compared to other developed economies. This strategy will continue to improve our ability to manage economic shocks and enhance our flexibility to respond to the challenges ahead," said Dr Cullen.

ENDS


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