© The Treasury The New Zealand Economy: Outlook and Policy Challenges Presentation to the Institute of Directors John Whitehead Secretary to the Treasury

NZ recession and recovery Mar-97Mar-99Mar-01Mar-03Mar-05Mar-07Mar-09Mar-11Mar-13 Budget Update Annual average % change Forecast

Higher unemployment Main forecast Mar-99Mar-01Mar-03Mar-05Mar-07Mar-09Mar-11Mar-13 % Forecast

Budget 2009 Forecasts 2013 Year ending 30 June % of GDP Forecast Budget deficits

Trading partner outlook improving

Stronger domestic confidence

Higher New Zealand dollar

Implications of recent data Good news: –The worst of the global recession is over –Signs of modest recovery in NZ Bad news: –Housing market strength and stronger NZ dollar suggest an unbalanced recovery (too much domestic demand, strong dollar, not enough exports)

NZ needs a switch in output towards the tradable sector

Looking forward: Twin challenges Complex inter-linkages between these two goals. But policies to address them are complementary Higher economic growth Reduced vulnerabilities

NZ’s income gap with Australia To close the gap we need SIGNIFICANTLY higher growth

NZ on path of slow decline

Have to make a choice about where our future lies

To reduce vulnerabilities we need less reliance on foreign borrowing

Bold policies to help rebalance the economy Tax mix: –Higher GST, land tax, capital gains tax. Lower income taxes (but which ones?). Monetary-Fiscal policy mix: –Slower growth in government spending would allow RBNZ to keep interest rates low for longer Structural policy reform that encourages resource shifting

Tough decisions

Barriers to reform Not enough focus on the magnitude of the challenges we face Too much focus on short-term pain of reform There is an urgent need to shift the focus and make clear the choices we face

Summary The economy is picking up but the recovery looks “unbalanced” NZ needs a comprehensive strategy for significantly lifting our future prosperity This will require bold policies that bring together tax reform and structural policy reform and permit a policy mix of tighter fiscal policy and looser monetary policy Business leaders have an important role to play in framing the policy debate

© The Treasury The New Zealand economy: outlook and policy challenges Presentation to the Institute of Directors John Whitehead Secretary to the Treasury