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Budget Statement Confirms Growth Strategy Needed

Budget Policy Statement Confirms Growth Strategy Needed

"The Budget Policy Statement confirms the government has a lot of work to do to achieve its growth targets", Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

Key features of the economic outlook presented by the government include the following:

• Annual growth in real gross domestic product (GDP) over the five years to June 2007 is projected to average just under 3 percent, with no signs of a trend increase.

• This rate is below the average annual growth rate of 3.3 percent achieved in the 10 years to 2002.

• It is also a significant margin below the expected medium-term Australian growth rate which is put at an average of around 3.5 percent a year.

• Unemployment is projected to remain stuck at around the current rate of 5.3 percent of the labour force; it is not trending down towards the prime minister's goal of a 3 percent rate.

Mr Kerr said that the most relevant indicator to track for the purposes of assessing progress towards the government's goal of returning New Zealand to the top half of the OECD income rankings was growth in real GDP per head.

Information on trends in real GDP per head is not presented directly in the Budget Policy Statement and December Economic and Fiscal Update. However, in its recent Quarterly Predictions, the New Zealand Institute of Economic Research forecast average increases in real GDP per head of under 2 percent per annum over the next five years. This outlook is consistent with the BPS/DEFU economic outlook, which also shows labour productivity growth (a key factor in growth of real GDP per head), remaining static at an assumed 1.5 percent a year.

Mr Kerr said that in a speech last week the minister of finance said that the annualised rate of growth of the economy of perhaps 4.5 percent in the first half of this year, "if sustained over a 5 to 10 year period, would more than likely return New Zealand to the top half of the OECD." This statement is incorrect. It refers to GDP, not GDP per head, and neglects the fact that annual population growth has been running at around 1.5 percent recently, making the annualised rate of growth in real GDP per head closer to 3 percent. A Treasury paper published last year suggested, on a range of assumptions, that growth in real GDP per head of between 4.6 percent and 7.4 percent per annum is required for 10 years to reach the government's goal.

Mr Kerr said it was pleasing that the government's fiscal projections were broadly in line with its targets and that the ratio of government spending (core Crown expenses plus contributions to the New Zealand Superannuation Fund) was projected to fall slightly to below 32 percent of GDP.

"The government should reinforce this trend by lowering its long-term objective for government spending from 35 percent of GDP to 30 percent. No comparable OECD country has achieved the government's targeted growth rate with New Zealand's levels of total government (including local government) spending. Together with the elimination of the dubious Superannuation Fund, this would pave the way for significant tax reductions and tax reforms which would also boost growth."

Mr Kerr said that next year would mark the tenth anniversary of the introduction of the Fiscal Responsibility Bill into the House. The resulting legislation had served New Zealand well in some respects – in particular, by making the government's financial position more transparent and avoiding post-election surprises – but not in others. It had not effectively constrained government spending, and the Budget Policy Statement had not served as a basis for effective public and parliamentary engagement with the government about budget policy, as originally intended. The Business Roundtable would be making suggestions for improvements to the Fiscal Responsibility Act 1994 in its submission on the 2003 Budget Policy Statement.

Mr Kerr said that New Zealand was continuing to enjoy moderate economic growth, due in part to recent favourable conditions but in particular to earlier economic reforms. However, it was not showing signs of moving to a higher level. The minister of finance had recently stated that it would be possible to judge whether the government was on track to meeting its more ambitious growth objectives by 2004. "Time is running out", Mr Kerr said. "A recent Herald report indicated that only 5 percent of the business leaders surveyed thought the government had an effective growth strategy. Developing a credible strategy is now a matter of urgency."

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