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Half Year Update Reveals Lacklustre Outlook

Half Year Economic and Fiscal Update Reveals Lacklustre Economic Outlook

“The forecasts in the budget documents for growth in the economy in the next five years remain far below finance minister Michael Cullen’s 2002 Budget target”, Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

“In that budget Dr Cullen said: “There is now a broad consensus that there is a need to lift [a presumed sustainable growth rate of around 3 percent], in the first instance to somewhere around the 4 percent mark if we are to see a long-term rise in our standard of living relative to the rest of the world.”

Mr Kerr said that five years later there had been no lift in New Zealand’s relative standard of living, and in no year in the forecast period did expected growth in real GDP exceed 3 percent. He said there was now no prospect that the government would achieve its former “top priority” goal of getting New Zealand into the top half of the OECD income rankings by 2011 (or even much later).

Many New Zealanders were unaware of the deteriorating outlook because in recent years it had been masked by high terms of trade, immigration inflows and excessively loose monetary policy.

Mr Kerr said that a key reason for the deterioration was a decline in trend productivity growth in the present decade compared to the much improved productivity performance of the 1990s.

Moreover, the economy remained between a rock and a hard place, with a projected continuation of high interest rates that were suppressing economic activity combined with high ongoing levels of inflation and current account deficits.

“The confirmation of personal tax cuts in next year’s budget will reduce the over-taxation of recent years and is welcome”, Mr Kerr said.

“Regrettably, however, there is no indication that the government plans to use tax policy to help reverse New Zealand’s sagging economic and productivity growth performance. For that purpose, it should adopt the 2001 Tax Review’s advice to move to a lower, flatter tax structure, involving reductions in the highest effective marginal tax rates and consequent improvements to incentives for productive effort. It should not continue to emphasise policies of income redistribution.

“The bottom line is that New Zealand’s economic outlook remains weaker than Australia’s over the next few years, and a much more determined growth strategy – focused on reduced and better quality government spending, lower taxation and less stifling regulation – is needed to avoid the prospect of widening income gaps”, Mr Kerr concluded.

18 December 2007


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