Gordon Campbell | Parliament TV | Parliament Today | News Video | Crime | Employers | Housing | Immigration | Legal | Local Govt. | Maori | Welfare | Unions | Youth | Search

 


Pre-election Economic and Fiscal Update 2014


Full PREFU: prefu14whole.pdf
Full Executive Summary with charts: prefu14pt2of11.pdf
Online: Pre-election Economic and Fiscal Update 2014 — The Treasury - New Zealand

Executive Summary

• The New Zealand economy is expanding at a robust pace, although growth momentum has eased from earlier in the year. Looking forward, real production gross domestic product (GDP) is forecast to grow by 2.8% on average over the four years to March 2018, essentially unchanged from the Budget Update. The near-term outlook remains for growth faster than potential driven by residential investment, positive migration inflows and still-high terms of trade.

• Real GDP growth for the year ending March 2014 was faster than expected in the Budget Update - 3.3% compared with 3.0% forecast - while growth for the year ending March 2015 is forecast to be lower at 3.8% (compared with 4.0% in the Budget Update). Growth is expected to slow later in the forecast period as the factors currently supporting growth decline and monetary conditions tighten (Figure 1).

• Rising construction activity is expected to be a key driver of growth, with earthquake rebuilding supplemented by a rebound in residential construction in Auckland in response to pent-up demand. Business investment is also forecast to pick up as productive capacity is more heavily utilised.

• Net migration inflows continue to rise, adding to both demand and the productive capacity of the economy. The net inflow is expected to reach 42,500 this year and overall to add an additional 3,500 to the population compared with the Budget Update, with risks skewed to the upside.

• Household income growth is underpinning consumption and residential investment activity. Over the forecast period household disposable incomes are forecast to increase 4.0% on average per year, after an estimated 7.1% increase in the year to March 2014. Employment and wage growth is expected to be the main driver of this growth, with labour income growing by 4.6% on average over the next four years.

• Recent falls in commodity prices (mainly dairy and forestry) have occurred earlier than envisaged in the Budget Update. As a result, the forecast decline in the goods terms of trade is occurring sooner than previously expected and consequently will provide less support to growth. The terms of trade are forecast to stabilise during 2015, recovering some of the decline currently being seen. Over the forecast period the terms of trade are expected to remain above the average experienced over the past decade (Figure 2). A more substantial and sustained short-term decline in export prices is an area of downside risk for the forecasts.

• The global backdrop to these forecasts is steady, but uneven, economic growth. Trading partner growth is likely to be similar to that recorded in the mid-2000s with moderate inflation. Risks overall remain skewed to the downside, with heightened geopolitical tensions adding to economic uncertainties.

• The exchange rate has remained elevated for some time, but is assumed to depreciate as the global outlook improves, foreign interest rates rise and the terms of trade fall from their recent peaks.

• The current account deficit is forecast to increase from around 2.6% of GDP in mid-2014 to 4.8% in the year to March 2015 owing to lower export volumes in the near-term and a decline in the terms of trade. The deficit is forecast to stabilise at 6.4% of GDP from late 2016.

• Fiscal policy is expected to exert a dampening influence on economic activity over the forecast horizon as slow growth in spending, combined with rising tax revenue, see the fiscal balance improve. The average fiscal impulse over the forecast period is unchanged from the Budget Update at -0.4% of GDP, but the timing and magnitude have changed with the impact of weaker tax receipts and changes in the expected timing of some forecast expenditure.

• Despite higher than forecast growth, annual Consumers Price Index (CPI) inflation in June 2014 was 1.6%, below the Budget Update forecast of 1.8%. With real GDP growth exceeding our estimate of potential growth, upward pressure on resources is forecast to continue to increase and lead to higher inflation. We forecast annual CPI inflation to peak at 2.5% in late 2016 before declining to around 2% by the end of the forecast period.

• Reflecting increased inflation pressures, we expect further increases in the Reserve Bank's Official Cash Rate (OCR) over the forecast period. Ninety-day interest rates are forecast to rise to 5.3% by late 2017.

• Nominal GDP increased 7.0% in the year to March 2014, 0.3 percentage points higher than expected in the Budget Update. In contrast, forecast growth for the year to March 2015 is 0.5 percentage points lower at 5.2% taking the level of nominal GDP below that forecast in the Budget Update. This mainly reflects the earlier decline in the terms of trade. The lower level of nominal GDP is expected to continue over the remainder of the forecast period. See the box Real and Nominal GDP on page 7 for an explanation of the different measures.

• The operating balance before gains and losses (OBEGAL) is forecast to move from an estimated $2.6 billion deficit in the year ending June 2014 to a surplus of $0.3 billion this fiscal year, and increasing thereafter to $3.0 billion in the year ending June 2018 (Figure 3). The OBEGAL surplus is $0.5 billion lower in the year ending 2018 than forecast in the Budget Update.

• Core Crown tax revenue for the year to June 2014 has been revised downward from that expected in the Budget Update. While still expected to increase across the forecast period, core Crown tax revenue is forecast to be below the Budget Update forecasts each year as a result of lower forecast nominal GDP. Forecast core Crown expenses remain largely unchanged from the Budget Update, declining to 30.0% of GDP by the end of the forecast period.

• Net core Crown debt is forecast to peak at 26.8% of GDP in the year ending June 2015 - slightly higher than 26.4% in the Budget Update. Thereafter, net debt is expected to reduce more slowly than in the Budget Update,reflecting a lower forecast path forcore Crown residual cash (which is now expected to return to surplus in the year ending June 2019). In dollar terms, net debt is forecast to peak at $67.9 billion in June 2018, $2.4 billion higher and a year later than forecast in the Budget Update.

• In addition to the risks noted above, there are other upside and downside risks to the judgements underpinning the forecasts. These include the size and pace of the Canterbury rebuild, the path and pass-through of the exchange rate and the saving behaviour of households. The potential impacts of some of these judgements evolving differently from the main forecast are highlighted in the Risks and Scenarios chapter. One scenario assumes that growth in the United States (US) is stronger, along with stronger domestic price pressures. Another scenario explores the impact of weaker short-term domestic demand combined with a larger decline in the terms of trade.

• As well as the fiscal impact of changes in economic activity, the Government is exposed to other fiscal risks that could impact both the operating balance and the balance sheet. For example, the Crown's financial position is susceptible to market movements in variables such as interest rates, exchange rates and equity prices. The final fiscal cost of the Christchurch earthquakes is also still uncertain. There are also a number of contingent liabilities and fiscal risks outlined in the Specific Fiscal Risks chapter.

Table 1 - Summary of the Treasury's main economic and fiscal forecasts - Economic (March years, %)
2013

Actual

2014

Actual

2015

Forecast

2016

Forecast

2017

Forecast

2018

Forecast

Economic growth1
Pre-election Update 2.23.33.83.02.22.1
Budget Update 2.33.04.03.02.12.1
Unemployment rate2
Pre-election Update 6.26.05.65.24.84.5
Budget Update 6.25.95.45.14.84.4
CPI inflation3
Pre-election Update 0.91.51.72.42.32.1
Budget Update 0.91.51.82.52.32.0
Current account balance4
Pre-election Update -3.9-2.8-4.8-6.2-6.4-6.4
Budget Update -3.9-3.1-4.4-5.9-6.2-6.3

Table 1 - Summary of the Treasury's main economic and fiscal forecasts - Fiscal (June years, % of GDP)
2013

Actual

2014

Forecast

2015

Forecast

2016

Forecast

2017

Forecast

2018

Forecast

Total Crown OBEGAL5
Pre-election Update -2.1-1.10.10.30.71.1
Budget Update -2.1-1.10.20.50.91.3
Net debt6
Pre-election Update 26.225.926.826.725.825.0
Budget Update 26.225.826.425.924.923.8

Notes:

1. Real production GDP, annual average percentage change

2. Percent of labour force, March quarter, seasonally adjusted

3. CPI, annual percentage change, March quarter

4. % of GDP

5. Total Crown operating balance before gains and losses (OBEGAL)

6. Net core Crown debt excluding the New Zealand Superannuation Fund and advances

Sources: Statistics New Zealand, the Treasury


© Scoop Media

 
 
 
 
 
Parliament Headlines | Politics Headlines | Regional Headlines

Digital Evolution: Scoop Independent News Launches "Operation Chrysalis"

From today Scoop is beginning a process of public consultation with the political, business and civil society groups it has served for the past 15 and a half years.

"It is hoped that in time - with new leadership and increased community engagement - the chrysalis will incubate a new kind of Scoop, one which can sustainably continue Scoop's Mission 'to be an agent of positive change'", says Scoop Founder, Editor and Publisher Alastair Thompson.

"As big publishing shrivels, public participation in contributing and spreading news has grown. Scoop has evolved with this wave by providing an independent platform, committed to upholding democracy, providing a voice to all, and providing the public easy access to information about decisions which affect them." More>>

 

Parliament Adjourns:

Greens: CAA Airport Door Report Conflicts With Brownlee’s Claims

The heavily redacted report into the incident shows conflicting versions of events as told by Gerry Brownlee and the Christchurch airport security staff. The report disputes Brownlee’s claim that he was allowed through, and states that he instead pushed his way through. More>>

ALSO:

TAIC: Final Report On Grounding Of MV Rena

Factors that directly contributed to the grounding included the crew:
- not following standard good practice for planning and executing the voyage
- not following standard good practice for navigation watchkeeping
- not following standard good practice when taking over control of the ship. More>>

ALSO:

Gordon Campbell:
On The Pakistan Schoolchildren Killings

The slaughter of the children in Pakistan is incomprehensibly awful. On the side, it has thrown a spotlight onto something that’s become a pop cultural meme. Fans of the Homeland TV series will be well aware of the collusion between sections of the Pakistan military/security establishment on one hand and sections of the Taliban of the other… More>>

ALSO:

Werewolf Satire:
The Politician’s Song

am a perfect picture of the modern politic-i-an:
I don’t precisely have a plan so much as an ambition;
‘Say what will sound most pleasant to the public’ is my main dictum:
And when in doubt attack someone who already is a victim More>>

ALSO:

Flight: Review Into Phillip Smith’s Escape Submitted To Government

The review follows an earlier operational review by the Department of Corrections and interim measures put in place by the Department shortly after prisoner Smith’s escape, and will inform the Government Inquiry currently underway. More>>

ALSO:

Intelligence: Inspector-General Accepts Apology For Leak Of Report

The Inspector-General of Intelligence and Security, Cheryl Gwyn, has accepted an unreserved apology from Hon Phil Goff MP for disclosing some of the contents of her recent Report into the Release of Information by the NZSIS in July and August 2011 to media prior to its publication. The Inspector-General will not take the matter any further. More>>

ALSO:

Drink: Alcohol Advertising Report Released

The report of the Ministerial Forum on Alcohol Advertising and Sponsorship has been released today, with Ministers noting that further work will be required on the feasibility and impact of the proposals. More>>

ALSO:

Other Report:

Leaked Cabinet Papers: Treasury Calls For Health Cuts

Leaked Cabinet papers that show that Government has been advised to cut the health budget by around $200 million is ringing alarm bells throughout the nursing and midwifery community. More>>

ALSO:

Get More From Scoop

 

LATEST HEADLINES

 
 
 
 
 
 
 
 
Politics
Search Scoop  
 
 
Powered by Vodafone
NZ independent news