New Zealand s Economic & Fiscal Outlook, Treasury s Long-Term Fiscal Statement, and Treasury s Living Standards Framework October 2013.

Transcription

1 New Zealand s Economic & Fiscal Outlook, Treasury s Long-Term Fiscal Statement, and Treasury s Living Standards Framework October 2013

2 Short-Term (next five years) Economic and Fiscal Outlook

3 Five Key Judgements International Economic Situation Effects of the Drought Canterbury Terms of Trade Monetary Conditions 3

4 Global Context

5 Global Outlook steady... Annual average % change 6 5 Forecast Trading Partner Growth Years ending 31 December

6 Global Economic Forecasts 2013 weights Actual Forecast Forecast Forecast Forecast Forecast Australia 27% China 17% United States 11% Japan 9% Euro area 8% United Kingdom 4% Canada 2% Other Asia* 23% Trading Partner Growth (TPG) 100% TPG - Consensus (April 2013) TPG - IMF WEO (April 2013) * South Korea, Taiwan, Hong Kong, Singapore, Malaysia, Indonesia, Thailand, Philippines, India

7 Changing export and import markets Exports Imports

8 Risks Risks more balanced than a year ago Global uncertainties remain Fiscal adjustments Monetary policy Slower growth in trading partners Domestic risks Mother nature - earthquakes and drought Saving behaviour and exchange rate

9 Domestic Outlook

10 Growth outlook influenced by supportive and constraining factors... On the supportive side: The Canterbury rebuild A high terms of trade Low interest rates Less risk-averse households and firms Factors constraining growth include: An elevated exchange rate Fiscal restraint The drought in the near term

11 ...but the overall economic outlook is similar to the Half Year Update Annual average % change Real GDP growth Forecast -4 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Quarterly BEFU HYEFU

12 Growth to be driven primarily through Investment and Consumption... Percentage point contribution to annual real GDP growth Years ended 31 March Exports Total consumption Non-residential investment & stocks Residential investment Imports Total GDP (annual average growth %)

13 Labour market is expected to strengthen over forecast period... % of labour force Annual average % change Forecast Quarterly Unemployment rate Employment (right scale) -2

14 ... while inflationary pressures pick up Annual % change 7 6 Forecast Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Quarterly CPI inflation Tradables Non-tradables

15 Low interest rates and the Canterbury rebuild $billions (in 1995/96 prices) 3.0 Forecast Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Quarterly Real residential investment Excluding Canterbury rebuild

16 ...but higher dairy prices will support a turnaround in the goods terms of trade Index (1995/96 = 1000) 1300 Forecast Quarterly

17 Summary (March Years, %) Economic (March years, %) Actual Estimate Forecast Forecast Forecast Forecast Economic growth Unemployment rate CPI inflation CA balance Fiscal (June years, % of GDP) Total Crown OBEGAL Net debt

18 ...and in an international context, growth looks good Forecast trading partner growth (calendar years), % change Source: Treasury

19 Current Account Current Account Deficit as % of GDP % %-pt deviation PREFU forecast BEFU less PREFU (RHS) BEFU 2012 forecast Forecast date

20 ... higher investment drives current account deficit % of GDP Current account Current account ex Canterbury rebuild

21 ...but there is still a large gap to close GDP per capita (Index) Australia 100 OECD average New Zealand

22 Tradeables and Non-tradeables Index Mar 2000 = 'Tradeable' and 'Non-Tradeable' GDP Tradable Non-tradable Q21989Q21991Q21993Q21995Q21997Q21999Q22001Q22003Q22005Q22007Q22009Q22011Q2

23 Long Term Economic Outlook Why am I an optimist? Food Education Tourism Health 23

24

25 Falling Poverty in Asia

26 Falling Poverty in Asia

27 Fiscal Strategy

28 Overview of fiscal strategy Restore Government s financial strength, reduce vulnerabilities Restrain expenditure growth On track for 2014/15 OBEGAL surplus Target net debt below 20% of GDP by

29 New spending $(millions) over four years Health Education Growth Package Emissions Trading Social Development Canterbury Housing Tertiary Other New contingencies New revenue Reprioritisation Net Savings to the centre

30 % of GDP From record deficit to surplus... $ billion Forecast $ billion Fiscal Impulse Expansion Years ended 30 June Core Crown residual cash OBEGAL Net debt (RHS) Contraction Fiscal Years

31 ...via slower spending growth Core Crown revenue & expenses, % of GDP New Operating Spending per Budget, $ billions / / / / / / / / /20 Core Crown expenses Core Crown revenue

32 $billions Tax revenue increases by $14.5b 15 Cumulative change relative to 2012/13 fiscal year Individuals Corporate GST Other

33 $billions Core Crown expenses grow $5.5b (but grow slower than tax revenue) 8 6 Cumulative change relative to 2012/13 fiscal year Budget 2013 Future allowances Social assistance Finance costs Earthquake Other Total increase

34 Net debt peaks: 28.7% of GDP in 14/15 $billions % of GDP 80 Forecast Year ended 30 June Net debt ($b) % GDP Borrowing $ 32b over next four years Borrowing costs $ 3.5b per year roughly the same as total annual spending on law & order

35 Affording Our Future The Treasury s 2013 Statement on the Long-Term Fiscal Position What s the story and why does it matter for you?

36 Background The Public Finance Act requires Treasury to publish a Statement on the Long-Term Fiscal Position at least every 4 years Must relate to a period of at least 40 years The 2013 Statement was presented to Parliament on 11 July Together with about 40 background papers, Affording Our Future is available on Treasury s website

37 Population growth (%)

38 Dependency ratio 65+ to People People

39 Changing balance between work/ remaining life for males turning 65

40 Slowing growth of the labour force

41 Key economic assumptions Trend productivity assumption of 1.5% growth in output per hour worked per annum from 2020 (versus 1.1% for the last 40 years) Average weekly hours worked assumed at 33.2 hours (compared with 34.6 hours over the last 35 years) Assumes an average annual consumer price inflation rate of 2% (the midpoint of the current inflation range target)

42 Treasury s long-term projections are a what if scenario Treasury s projections do not include the longterm consequences of the Government s fiscal strategy (the May 2013 FSR) Rather, they use a Resume Historic Cost Growth scenario from the 2015/16 fiscal year (first full fiscal year of new Parliamentary term) Point is to show how expense categories might grow in the future, using the past as a guide

43 What exactly is the Resume Historic Cost Growth scenario? Historic growth rates per recipient in different expense categories; plus Current legislative settings (e.g. for welfare benefits and NZ Super); plus Assumptions about future demographics; plus Assumptions about future economic factors

44 The Resume Historic Cost Growth scenario shows: If we allow expenses to grow in accordance with the Resume Historic Cost Growth scenario from 2015/16 And collect the same amount of tax as in recent history (29% of GDP) We ll face a growing gap between revenue and expenses, which we ll need to borrow to fill

45 Key Conclusions from Resume Error! Unknown document property name. Historic Cost Growth projections % of nominal GDP Healthcare NZ Super Education Law and order Welfare (excluding NZ Super) Other Debt-financing costs Total government expenses Tax revenue Other revenue Total government revenue Expenses less revenue Net government debt

46 Major spending areas and aggregate revenue % of GDP Other Finance costs Revenue Education Health 10 Welfare 5 Super

47 FSR versus LTFS You may have noticed net Crown debt is projected to be higher in 2020 in Affording Our Future compared with the Government s commitment of no higher than 20% of GDP in its May 2013 Fiscal Strategy Report That is because Treasury projections capture scale of potential expense pressures, based on historic rates of expenses growth re-asserting themselves from 2015/16, versus this Government s commitments should it be responsible for the annual budgets through to 2020 The Government s approach is more fiscally prudent and more fiscally constrained than recent governments

48 Adjusting early, pays big dividends over time Stick with the current fiscal strategy (or a different equally prudent alternative) until 2020, before letting historic rates of Crown expenses growth per recipient to re-assert themselves thereafter : Net Crown Debt would be around 39% in 2059/60 and rising Maintain fiscal strategy until 2016/17 before you let historic expense patterns progressively re-assert themselves: Net Crown Debt would be around 124% of GDP in 2059/60 and rising Maintain fiscal strategy until we return to surplus in 2014/15, but then turn on history (from 2015/16) : Net debt would be around 198% of GDP by June 2060 and rising)

49 Putting that into a graph... Net government debt 60 as % GDP "Resume Historic Cost Growth" scenario from 2015/16 Current fiscal strategy to 2016/17, then "Resume Historic Cost Growth" scenario Current fiscal strategy to 2019/20, then "Resume Historic Cost Growth" scenario

50 The Illustrative Options Different governments might make different choices to meet the longterm fiscal challenge that s why the Statement analyses some illustrative examples of policy changes that future governments could consider to address long-term fiscal issues, including: Options to increase taxes Options to constrain growth in health spending Options to constrain growth in spending on NZ Super There are many, many more in the Background Papers Supporting the Statement... And an on-line long-term fiscal calculator at

51 It isn t just about money... Economic Growth Managing Risk Living Standards Sustainability for the Future Social Infrastructure Increasing Equity

52 Treasury s Living Standards Work Programme

53 Treasury s Vision To be a world class Treasury working for higher living standards for New Zealanders. 53

54 Better Life vs. GDP 54

55 The Living Standards Framework Distribution within the population and over time 55 Subjective Wellbeing

56 A Proxy Social Welfare Function for NZ Economic Growth Managing Risk Living Standards FINANCIAL & PHYSICAL Financial Wealth Housing Infrastructure NATURAL Climate Biodiversity Water Sustainability for the Future SOCIAL Institutions Trust HUMAN Skills Health Social Infrastructure Increasing Equity 56

57 Key Policy Question Instead of thinking of trade-offs between the five corners of the living standards cobweb, can we come up with policies that make these corners mutually reinforcing so that we can create an expanding dynamic cobweb? 57

58 Example: Education Reforms Economic Growth 10 5 Managing Risk Sustainability for the Future 0 Status quo Policy change Social Infrastructure Increasing Equity 58 Note: This is intended to demonstrate how the diagram could be used, rather than a Treasury view of the recommendations

59 How might we measure progress for New Zealand? Economic Growth NNI / capita Managing Risk Living Standards FINANCIAL & PHYSICAL Financial Wealth Housing Infrastructure NATURAL Climate Biodiversity Water Sustainability for the Future NII position of NZ Reducing crime rate Reduction in social welfare dependency SOCIAL Institutions Trust HUMAN Skills Health gross capital formation GHG emissions tonnes/capita % aged between with tertiary qualifications Social Infrastructure Increasing Equity World Bank government effectiveness indicator World Values Survey: social trust indicator 59 % of population below 50% of median income Difference in the PISA score between the top and bottom 10% of students

60 Example: Living Standards Assessment: Risk Management Method: Increasing the freedoms of individuals to enjoy desired lifestyles Elements: Physical Human Social Natural Capital Capital Capital Capital Risks Earthquakes Crime Welfare dependency Climate Change e.g. Floods Ill health Economic crises Biodiversity risks Eruptions Skill Deficiency Education failure Erosion Infrastructure disrepair Civic society failure White elephants Mitigations Insurance Education Policy Welfare Reform Emissions Trading 60