GLOBAL FINANCIAL CRISIS
NEW ZEALAND: REBUILDING FISCAL BUFFERS AFTER THE GLOBAL FINANCIAL CRISIS
Prudent policies enabled New Zealand to deal with simultaneous global financial and domestic seismic shocks, says the country’s Finance Minister. He explains why it responded so well and how it is preparing to cope with future shocks.
Hon. Bill English, MP, in Wellington. Mr English is New Zealand’s Minister of Finance and Deputy Prime Minister. He has been a Member of the House of Representatives for the National Party since 1990. A former Leader of his party from 2001 to 2003, he has held several government and opposition Front Bench positions, including being Minister of Finance and of Revenue and then Treasurer in 1999. He was Minister for Infrastructure from 2008 to December 2011 when he became Minister of Finance.
Hon. Bill English, MP
Being at the bottom of the world did not spare New Zealand or New Zealanders from the negative fallout of the global financial crisis (GFC). In the two years until the end of 2009, our economy’s output took a four-per- cent hit and the unemployment rate more than doubled to peak at around 7.0 per cent.
After a decade of strong consumer spending, many households cut back and focused instead on paying down their debt. New Zealand exporters experienced a decline in sales volumes, although our primary industry exporters were partly sheltered by on-going resilience in the prices of New Zealand- relevant commodities which have been underpinned by the country’s expanding trade links with dynamic Asian economies.
New Zealand-registered banks 112 | The Parliamentarian | 2013: Issue Two
had little direct exposure to the United States financial crisis; but they were reliant on global short-term wholesale markets for funding. As activity in these markets collapsed after the failure of Lehman Brothers, some banks feared the prospect of being unable to rollover their debt. And in addition to dealing with the effects of the global financial crisis, the New Zealand economy faced its own domestic shocks, most notably the severe earthquakes in Canterbury, a major exporting province, in 2010 and 2011.
Strength from prudent fiscal planning
New Zealanders responded well to the challenges posed by these multiple adverse shocks. Gross domestic product has been expanding at a modest but steady pace since the beginning of 2011. In the final quarter of 2012, the economy expanded by 1.5 per cent compared with the previous quarter and by 3.0 per cent compared with the same quarter of the previous year. I believe that one of the reasons why New Zealand has emerged from this difficult period relatively well is the country’s fiscal policy framework. For over two decades, governments have been required by law to maintain a transparent spending and tax framework and to maintain prudent
public sector debt levels.
It means that when the country was struck by a cocktail of external and internal shocks, the government had scope to respond appropriately to support economic activity in the short term, and to lead efforts to rebuild devastated Canterbury in the longer term.
The government allowed the automatic stabilizers to operate fully during the global financial crisis and after the Canterbury earthquakes. The government’s operating balance before market gains and losses (OBEGAL) shifted from a surplus of 3.0 per cent of GDP in 2007/08 to a 9.2 per cent deficit in 2011/12, as the government responded to the aftermath of the earthquakes in Canterbury and protected New Zealand families from the worst effects of the recession. Where expenditure cuts did occur, they were concentrated in areas considered to have a relatively limited negative impact on private sector spending, such as suspending the government’s payments to the New Zealand Superannuation Fund in 2009.
Temporary measures and longer-term efficiencies Core government net debt rose from a low point of 5.6 per cent of GDP in the financial year to June 2008 to nearly 25
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