IPS & IPANZ Seminar

The 2009 Budget and Macroeconomic Outlook

Jean-Pierre De Raad (NZIER) &

Derek Gill (IPS) 2 June 2009

Part 1 – Comments on Budget 2009

• Macroeconomic Context

• NZ Macroeconomic Outlook

• Fiscal Strategy & Outlook

• Emergent Strategy?

Part 2- Macro Impact of Fiscal Stimulus

Macro Context –’Horns of a dilemma’

• “the global economy is experiencing the deepest most synchronised recession since the 1930s” (2009 Budget ES P1)

• Consensus Trading Partner Growth Forecast (2009-11 Calendar AAPC) –2.5%,+1%, +2.2%

• Perfect Storm – Inventory Cycle, Credit Crunch, Asset Price falls• Sharpest Real Economy/ inventory cycle since the 1930s e.g. Q1

2009 first (non war) fall world trade volumes, Japanese exports fell 26% and RGDP 15.2% (apc).

• Financial Crises trigger prolonged recessions – output 9% fall over 2 years, 35% fall in house prices over 6 years (Reinhart & Rogoff: 2009: AER P&P)

• Stock Market Crashes (+25%) go with 30% chance of major recessions (10%+ falls in RGDP) and 11% chance of depression (25%+ fall in RGDP)(Barro: 2009: NBER WP 14760)

NZ Macro Outlook- ‘Between a rock and a hard place’

-4

-3

-2

-1

0

1

2

3

4

5

6

7

Mar-97 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13

QuarterlyUpside scenario Main forecast Downside scenario

Annual average % change

Forecasts

NZ Macro Outlook- ‘Between a rock and a hard place’

• Comparison with other forecasts

RGDPForecasts

11 Other Forecasters

2009 2010 2011 2012

Average (ex-Treasury) -0.8 -0.7 2.9 3.2

Treasury -0.9 -1.7 1.8 2.9

Minimum (ex-Treasury) -1.3 -2.3 1.8 2.2

Maximum (ex-Treasury) -0.1 1.1 4.8 3.9

How does the current recession compare with previous recessions?

93

94

95

96

97

98

99

100

101

0 1 2 3 4 5 6 7

Index

Quarters

Mar 91

Sep 82

Sep 76

Mar 67

current

Mar 88

Sep 97

Mar 91

Sep 82

Sep 76

Mar 67

current

Mar 88

Sep 97

Fiscal Strategy & Outlook – Balancing the short & medium term?

30

35

40

45

50

55

60

65

70

75

80

2000 2002 2004 2006 2008 2010 2012

June Years

$ billion

Budget 2008 RevenueBudget 2009 RevenueBudget 2008 ExpensesBudget 2009 Expenses

Actual Forecast

Fiscal Strategy & Outlook – Balancing the short & medium term?

• Revised Long term debt objective (new net debt peaks at 40% GDP aimed at 30% 2020s)

• Cf 20% Gross Debt ratio & NZSF (2008 Budget P48)

• Reduce future operating allowances increases to $1.1b. from 2010 (from $1.4b in 2009, $1.7 previously)

• Delay 2010 & 2011 tax cuts• Suspend NZS contributions until surpluses

Trends in the key fiscal aggregates (%GDP)

• Core Revenues stable around 32% despite tax cuts

• Core Current Spending increase from 32% (2008) to nearly 37% (2010-2012)

• Operating Balance (ex NZSF, accy + /-)• +3% (2008) -5% (2010-2133) • Large deterioration in new net core debt

from +6% in 2008 to 2013 :Central -30.9 Rosy -22.5% Gloomy -50%

Trends in Sector Shares (%NGDP)

• Where is 5% growth in core spending in 2008/10– Social Welfare – 2% ($1.7b in 2010 only)– Health - 1% ($1.0b in 2010 only)– Education – 0.8% ($0.3b 2010 only )– Law & Order – 0.5% ($0.15b 2010 only)– Other – eg Defence – 0.2% ($0.1b 2010 only )

• Nominal GDP broadly flat – 2008 – 2011 • How will a 1.7% increase ($1.1b) be managed in 2011?• How will long term trend growth in the big four be

managed?

Emergent Strategy?

• Task forces on Tax, Infrastructure, Electricity etc.

• “Predictable, pragmatic, if unexciting”• Budget emphasised infrastructure spending and

sustaining income support, health and (non tertiary) education, law and order

What will second term issues be:• NZ Super – 66% at 65? • Improving system performance eg health• Gloomy or Rosy Scenario?

Macro impacts of the fiscal stimulus

IPS/NZIPA lunchtime seminar

2 June 2009

Supporting jobs one of three objectives in budget

Employment & Unemployment

-6

-4

-2

0

2

4

6

1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

An

nu

al %

ch

an

ge

0

2

4

6

8

10

12

% o

f la

bo

ur

forc

e

Employment Growth, LHS

Unemployment Rate, RHS

Source: Statistics NZ, NZIER

Forecasts

$10b fiscal stimulus package pre budget 09

• fiscal impulse indicator of 5.4% of GDP

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2009 2010 2011 2012

Infrastructure

Business Tax Cuts

Personal Tax Cuts

$b

Sagging income puts dent in tax revenues

Real GDP Per Capita

21000

23000

25000

27000

29000

31000

33000

35000

37000

1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

An

nu

alis

ed

re

al G

DP

/ca

pita

Real GDP per capita, annualised

1992-2008 trend

Forecasts

Source: Statistics NZ, NZIER

Tax rises & spending cuts to curb rising debt

Fiscal stimulus supports jobs

-0.2

0.0

0.2

0.4

0.6

0.8

2007 2010 2013 2016 2019 2022

Real GDP

Employment

Capital stock

% deviation from base case

But it has to be paid back

-1.0

0.0

1.0

2.0

3.0

4.0

2007 2010 2013 2016 2019 2022

Real GDP

Real private consumption

Real public consumption

% deviation from base case

Stimulus does not help external imbalanceCurrent Account

-12

-10

-8

-6

-4

-2

0

2

4

6

1988 1992 1996 2000 2004 2008 2012

% o

f G

DP

(a

nn

ua

l)

Goods & Services TradeNet incomeCurrent Account

Source: Statistics NZ, NZIER

Forecasts