Wellbeing Budget 2022

A Secure Future

The Fiscal Strategy

The Public Finance Act 1989 requires the Minister of Finance to present to the House on Budget day a report on the Government’s fiscal strategy.

Sections 26J-26L of the Public Finance Act 1989 prescribe the required content of this report. This chapter and page 12 and 13 of the “Budget 2022: the Wellbeing Outlook and Approach” chapter constitute the Fiscal Strategy Report required by the Public Finance Act 1989.

The economic outlook

New Zealand's economy has come through COVID-19 in one of the strongest positions in the world…

Our ability to make the investments that we're making at Budget 2022 for a more secure future is because New Zealand's economy has come through the pandemic stronger than most countries. Real economic activity in the December 2021 quarter was 3.5 percent ahead of pre-pandemic levels, unemployment is at a record-low 3.2 percent and the Government's fiscal position is out-performing the economies we compare ourselves against.

This has been recognised around the world: New Zealand has top Triple-A credit ratings from both S&P Global Ratings and Moody's, one of only 12 countries with at least two Triple-A credit ratings.

The COVID-19 pandemic caused a one-in-one hundred year global economic shock and is contributing to ongoing international volatility through ongoing supply chain disruption. The Government responded with an unprecedented health and economic response, which allowed us to protect lives and livelihoods through the course of the pandemic. The strength of our economic recovery has put us in a good position to invest in areas that will improve our economic security, including addressing long-term challenges such as climate change.

Figure 1 - Percentage change in real GDP in COVID-19 and GFC, compared to their respective previous peaks

Sources: Stats NZ, Treasury calculations

Note: The December 2007 quarter is the reference quarter for the peak value before the GFC and the December 2019 quarter is the reference quarter for the peak value before the COVID-19 crisis.

Our economic management throughout the pandemic contributed to a historically strong economic recovery, particularly given the seriousness of the economic impact. As Figure 1 shows, the economic contraction associated with COVID-19 was much deeper and much more sudden than what New Zealand experienced during the Global Financial Crisis (GFC). Real GDP fell 10 percent in the second quarter of 2020 as a result of the economic impacts of COVID-19, compared to a peak-to-trough fall of nearly 3 percent of GDP through to the second quarter of 2009 following the GFC. Government support of businesses and workers contributed to a much stronger economic bounce-back from COVID-19. New Zealand's real GDP was back to pre-pandemic levels within three quarters from the start of the crisis. In comparison, following the GFC, New Zealand's real GDP took 10 quarters to return to pre-recession levels (Q2 2010).

Figure 2 - Change in employment rate in COVID-19 and GFC, compared to their respective previous peaks

Sources: Stats NZ, Treasury calculations

Note: The December 2007 quarter is the reference quarter for the peak value before the GFC and the December 2019 quarter is the reference quarter for the peak value before the COVID-19 crisis.

Employment outcomes during these two crises show an even sharper contrast. Figure 2 shows the change in the employment rate from its previous peak since the onset of the crisis (with a fall in the employment rate broadly corresponding to an increase in the unemployment rate). The employment rate declined almost three percentage points from its pre-crisis level following the GFC and stayed below pre-GFC levels for most of the next decade. The economic and social costs of long-term unemployment can be great, and international research has focused on the lasting effects of job displacement through the atrophy of skills and workers becoming discouraged about their ability to find work.[7]

Notes

  1. [7] See CAMA working paper: Hysteresis and full employment in a small open economy (https://cama.crawford.anu.edu.au/publication/cama-working-paper-series/18883/hysteresis-and-full-employment-small-open-economy) and Blanchard, 2018, Should We Reject the Natural Rate Hypothesis? (https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.32.1.97).
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