New Zealand s Economic & Fiscal Outlook, Treasury s Long-Term Fiscal Statement, and Treasury s Living Standards Framework October 2013
Short-Term (next five years) Economic and Fiscal Outlook
Five Key Judgements International Economic Situation Effects of the Drought Canterbury Terms of Trade Monetary Conditions 3
Global Context
Global Outlook steady... Annual average % change 6 5 Forecast Trading Partner Growth 4 3 2 1 0-1 2000 2002 2004 2006 2008 2010 2012 2014 2016 Years ending 31 December
Global Economic Forecasts 2013 weights 2012 2013 2014 2015 2016 2017 Actual Forecast Forecast Forecast Forecast Forecast Australia 27% 3.6 2.7 2.9 3.0 3.0 3.0 China 17% 7.8 8.0 7.6 7.3 7.0 7.0 United States 11% 2.2 1.7 2.4 2.5 2.5 2.5 Japan 9% 2.0 1.0 1.4 1.1 1.0 1.0 Euro area 8% -0.5-0.4 1.0 1.2 1.3 1.4 United Kingdom 4% 0.3 0.7 1.4 1.8 2.0 2.0 Canada 2% 1.8 1.6 2.3 2.4 2.5 2.5 Other Asia* 23% 3.8 4.3 4.7 5.0 5.0 5.0 Trading Partner Growth (TPG) 100% 3.5 3.4 3.8 3.8 3.8 3.9 TPG - Consensus (April 2013) 3.5 3.5 3.9 4.1 4.1 4.0 TPG - IMF WEO (April 2013) 3.5 3.5 4.1 4.2 4.3 4.4 * South Korea, Taiwan, Hong Kong, Singapore, Malaysia, Indonesia, Thailand, Philippines, India
Changing export and import markets Exports Imports
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
Domestic Outlook
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
...but the overall economic outlook is similar to the Half Year Update Annual average % change 8 6 4 2 0-2 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
Growth to be driven primarily through Investment and Consumption... Percentage point contribution to annual real GDP growth 6 5 4 3 2 1 0-1 -2-3 -4 2012 2013 2014 2015 2016 2017 Years ended 31 March Exports Total consumption Non-residential investment & stocks Residential investment Imports Total GDP (annual average growth %)
Labour market is expected to strengthen over forecast period... % of labour force 8 7 6 5 4 3 Annual average % change Forecast 4 3 2 1 0-1 2 2000 2002 2004 2006 2008 2010 2012 2014 2016 Quarterly Unemployment rate Employment (right scale) -2
... while inflationary pressures pick up Annual % change 7 6 Forecast 5 4 3 2 1 0-1 -2-3 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Quarterly CPI inflation Tradables Non-tradables
Low interest rates and the Canterbury rebuild $billions (in 1995/96 prices) 3.0 Forecast 2.5 2.0 1.5 1.0 0.5 0.0 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
...but higher dairy prices will support a turnaround in the goods terms of trade Index (1995/96 = 1000) 1300 Forecast 1200 1100 1000 900 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 Quarterly
Summary (March Years, %) Economic (March years, %) 2012 2013 2014 2015 2016 2017 Actual Estimate Forecast Forecast Forecast Forecast Economic growth 1.9 2.5 2.4 3.0 2.6 2.2 Unemployment rate 6.7 6.9 6.0 5.9 5.5 5.2 CPI inflation 1.6 0.9 1.9 2.0 2.0 2.2 CA balance -4.4-4.8-4.8-5.2-5.8-6.5 Fiscal (June years, % of GDP) Total Crown OBEGAL -4.4-2.9-0.9 0.0 0.3 1.0 Net debt 24.3 27.1 28.4 28.7 28.1 27.3
...and in an international context, growth looks good Forecast trading partner growth (calendar years), % change 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5 Source: Treasury 2013 2014 2015
Current Account Current Account Deficit as % of GDP % %-pt deviation 0 0.5-2 0.0-4 -5-0.5-1.0-1.5-7 -2.0-9 00 01 02 03 04 05 06 07 08 09 PREFU forecast BEFU less PREFU (RHS) -2.5 10 11 12 13 14 15 16 BEFU 2012 forecast Forecast date
... higher investment drives current account deficit % of GDP 0-1 -2-3 -4-5 -6-7 -8-9 -10 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Current account Current account ex Canterbury rebuild
...but there is still a large gap to close GDP per capita (Index) 140 120 Australia 100 OECD average New Zealand 80 1970 1978 1986 1994 2002 2010
Tradeables and Non-tradeables Index Mar 2000 = 100 160 'Tradeable' and 'Non-Tradeable' GDP 140 120 100 80 60 Tradable Non-tradable 40 20 0 1987Q21989Q21991Q21993Q21995Q21997Q21999Q22001Q22003Q22005Q22007Q22009Q22011Q2
Long Term Economic Outlook Why am I an optimist? Food Education Tourism Health 23
Falling Poverty in Asia
Falling Poverty in Asia
Fiscal Strategy
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 2020 28
New spending $(millions) over four years -500 0 500 1000 1500 2000 Health Education Growth Package Emissions Trading Social Development Canterbury Housing Tertiary Other New contingencies New revenue Reprioritisation Net Savings to the centre
% of GDP From record deficit to surplus... $ billion 15 10 Forecast $ billion 80 70 4 3 Fiscal Impulse Expansion 5 0 60 50 2-5 40 1-10 -15 30 20 0-20 -25 2000 2002 2004 2006 2008 2010 2012 2014 2016 Years ended 30 June Core Crown residual cash OBEGAL Net debt (RHS) 10 0-1 -2 Contraction 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Fiscal Years
...via slower spending growth Core Crown revenue & expenses, % of GDP 36 34 32 30 28 New Operating Spending per Budget, $ billions 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 26 2003/04 2005/06 2007/08 2009/10 2011/12 2013/14 2015/16 2017/18 2019/20 Core Crown expenses Core Crown revenue -0.5-1.0 2004 2006 2008 2010 2012 2014 2016
$billions Tax revenue increases by $14.5b 15 Cumulative change relative to 2012/13 fiscal year 10 5-2014 2015 2016 2017 Individuals Corporate GST Other
$billions Core Crown expenses grow $5.5b (but grow slower than tax revenue) 8 6 Cumulative change relative to 2012/13 fiscal year 4 2 0-2 -4 2014 2015 2016 2017 Budget 2013 Future allowances Social assistance Finance costs Earthquake Other Total increase
Net debt peaks: 28.7% of GDP in 14/15 $billions % of GDP 80 Forecast 35 70 30 60 25 50 20 40 15 30 20 10 10 5 0 0 2003 2005 2007 2009 2011 2013 2015 2017 Year ended 30 June Net debt ($b) % GDP Borrowing $ 32b over next four years Borrowing costs $ 3.5b per year roughly the same as total annual spending on law & order
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?
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
Population growth (%) 3.0 2.0 1.0 0.0-1.0 1950 1970 1990 2010 2030 2050
Dependency ratio 65+ to 15-64 People 15-64 People 65+ 2010 2060
Changing balance between work/ remaining life for males turning 65
Slowing growth of the labour force
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)
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
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
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
Key Conclusions from Resume Error! Unknown document property name. Historic Cost Growth projections % of nominal GDP 2010 2020 2030 2040 2050 2060 Healthcare 6.8 6.8 7.7 8.9 9.9 10.8 NZ Super 4.3 5.1 6.4 7.1 7.2 7.9 Education 6.1 5.3 5.2 5.2 5.1 5.2 Law and order 1.7 1.4 1.4 1.4 1.4 1.4 Welfare (excluding NZ Super) 6.7 4.8 4.4 4.2 4.0 3.8 Other 6.5 5.6 5.7 5.8 5.9 6.1 Debt-financing costs 1.2 1.8 2.5 4.2 7.1 11.7 Total government expenses 33.4 30.8 33.4 36.9 40.6 46.8 Tax revenue 26.5 28.9 29.0 29.0 29.0 29.0 Other revenue 3.2 3.0 3.2 3.2 3.3 3.6 Total government revenue 29.7 31.9 32.2 32.2 32.3 32.6 Expenses less revenue 3.6-1.1 1.2 4.6 8.3 14.3 Net government debt 13.9 27.4 37.1 67.2 118.9 198.3
Major spending areas and aggregate revenue % of GDP 50 45 40 35 30 25 Other Finance costs Revenue 20 15 Education Health 10 Welfare 5 Super 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
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
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)
Putting that into a graph... Net government debt 60 as % GDP 50 40 30 20 10 0 1997 2002 2007 2012 2017 2022 2027 2032 "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
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 http://nzpublicfinance.com/ltf-calculator-introduction/
It isn t just about money... Economic Growth Managing Risk Living Standards Sustainability for the Future Social Infrastructure Increasing Equity
Treasury s Living Standards Work Programme
Treasury s Vision To be a world class Treasury working for higher living standards for New Zealanders. 53
Better Life vs. GDP 54
The Living Standards Framework Distribution within the population and over time 55 Subjective Wellbeing
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
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
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
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 35-34 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
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