GLOBAL FINANCIAL CRISIS
Work on these issues should ultimately help rebalance the economy, shifting resources back towards the tradable sector and towards greater reliance on domestic rather than foreign savings to fund investment.
New Zealand Prime Minister Rt Hon. John Key, MP, (front centre left) and cabinet colleagues escort Mr English (front right) to the Chamber on Budget Day 2013.
per cent in the year to June 2012. The government judged that this temporary growth in the deficit and debt was appropriate to buffer the economy as households and businesses repaired their balance sheets.
More importantly, the government also required public agencies to deliver better results from the spending and programmes they were undertaking already. These improved results are focused on challenging areas such as reducing crime, improving education standards and getting more New Zealanders off welfare and into work.
As economic conditions stabilized and household confidence started to recover, fiscal policy moved into a consolidation phase, reducing the degree of economic stimulus. Key targets are to return the operating balance to surplus by 2014/15, and to reduce net government debt to 20 per cent of GDP by 2020. This is aimed at reducing core government expenses from around 35 per cent of GDP in 2012 to around 30 per cent of GDP by 2016/17. This slowdown in expenditure growth is being achieved through a number of policies, including reductions in the size of new spending allowances and efficiency gains across the state sector, changes to welfare policies and restraint in public sector wage growth.
To stabilize the financial sector during the height of the GFC, the government of the day introduced a temporary and optional insurance scheme called the Crown Deposit Guarantee Scheme.
It provided a government guarantee on retail deposits in New Zealand banks and finance companies that paid fees to participate in the scheme. This guarantee expired in December 2011, with the government having paid out around NZ$1.8 billion to deposit holders.
Facing future financial risks With this experience in mind, the government has tried to reduce the risk of future taxpayer-funded bailouts after institutional failures.
To provide an alternative policy option after a bank failure, the Reserve Bank has worked on developing an Open Bank Resolution (OBR) policy to deal with the failure of a systemically important financial institution. The OBR policy aims to minimize the disruption of a bank failure on the wider financial system and reduce the cost of a bailout to taxpayers.
In addition to the OBR policy, the Reserve Bank has also worked on developing a macro prudential policy strategy, which should allow it to better manage the risks to the
financial system from excessive asset price growth and the rapid build-up of debt. The Reserve Bank has identified several macro prudential policy tools which could play a role in maintaining a sound financial system. They include: counter-cyclical capital buffers, which form part of the Basel III framework; adjustments to sectoral capital risk weights and core funding ratios, and restrictions on high loan-to-value lending by banks. A Memorandum of Understanding between the Reserve Bank and the government will formalize the policy framework.
Growing national savings and the economy
Over the longer term, other policy challenges lie ahead.
Since the mid-2000s, the largest contribution to economic growth has come from the non-tradables sector, with many tradable industries contracting. In addition, New Zealand’s external indebtedness remains high by international standards, raising concerns about our vulnerability to conditions in international capital markets. Understanding the drivers of these trends is a key policy focus. For example, a government-appointed working group explored many of the issues around New Zealand’s relatively low rate of national saving.
New Zealand’s long-run growth performance is also an important focus, as its average growth rate and its productivity performance have lagged behind many other Organization for Economic Co-operation and Development economies over several decades. This ongoing reduction in New Zealanders’ average income relative to other better-performing countries has contributed to New Zealand’s large migration outflows to other countries, particularly Australia. As a result, the government has introduced a Business Growth Agenda, an integrated programme of several hundred policies that aims to help firms develop and to ultimately lift New Zealand’s standard of living. The Agenda focuses on six main workstreams to assist growth by creating a more productive and competitive economy – growing export markets, building innovation, improving infrastructure, expanding capital markets, sustainably developing natural resources and developing a more dynamic and flexible labour market.
For example, the target of lifting the ratio of exports to GDP to 40 per cent by 2025 is based on improving access to international markets, increasing earnings from tourism and growing exports of education services.
New Zealand’s recovery is being helped by our stable and efficient financial system. The government’s intention to consolidate its financial position and return debt to prudent levels has been well signalled in the Fiscal Strategy Report, published in the annual budget each May. With New Zealand now in its third year of recovery, the government is working hard to build up the strength of the Crown’s financial position as a buffer against the next shock that may come our way.
The Parliamentarian | 2013: Issue Two | 113
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