The Fiscal Strategy
This chapter meets the requirement for the Government to report on its fiscal strategy alongside the Budget as set out in sections 26I-26L of the Public Finance Act 1989 (PFA).
This Coalition Government published a Wellbeing Outlook as part of our first Wellbeing Budget last year.
The Public Finance (Wellbeing) Amendment Bill is currently at the Second Reading phase of the legislative process and is scheduled to pass later this year.
Once this bill has passed, future Fiscal Strategy reports will need to explain how the Government's wellbeing objectives have guided its Budget and fiscal decisions.
The economic outlook
Economic growth in New Zealand was robust prior to COVID-19
Prior to the COVID-19 pandemic, real GDP growth in the year to December 2019 was higher than many of our international peers (Figure 6). Unemployment was at historically low levels and inflation was within the target range.
New Zealand's fiscal position was strong. This Coalition Government delivered on its plan to reduce net core Crown debt below 20 per cent of GDP and achieved $12.9 billion of OBEGAL surpluses in our first two years in office.
This strong fiscal position means we are well placed to use the Crown's balance sheet to cushion the blow of COVID-19 on the economy and support the wellbeing of New Zealanders.
Figure 6 – Real GDP growth compared to other advanced economies
Source: The Treasury, Haver, Stats NZ
The global COVID-19 pandemic has placed extreme stress on the global economy
With the outbreak of COVID-19 almost all advanced countries are facing a public health and economic challenge. While the crisis continues to unfold, the COVID-19 pandemic has already had a widespread, global impact, with countries grappling with the economic implications and the steps needed to contain the virus. The International Monetary Fund (IMF) expects a decline in global economic activity not seen in peacetime since the Great Depression of the 1930s, with annual global growth expected to fall to -3.0 per cent in 2020 (Figure 7).
Figure 7 – Global growth
Source: IMF World Economic Outlook (April 2020)
The Coalition Government acted swiftly to contain the virus and cushion the economic blow to New Zealanders. However, the impact on parts of the domestic economy has already been severe. Early indicators such as the number of daily arrivals of non-New Zealand passport holders have fallen to near zero as New Zealand closed its borders to limit the spread of COVID-19 (Figure 8).
Figure 8 - Daily arrivals of non-New Zealand passport holders
Source: New Zealand Customs Service, Stats NZ
The COVID-19 pandemic will have a substantial impact on growth and unemployment
The Treasury's 2020 Budget Economic and Fiscal Update (Budget Update) forecasts and alternative scenarios indicate there will be a sharp fall in economic activity and a substantial rise in unemployment. This is driven by the important public health steps required to save lives by stamping out COVID-19, the total stop in international tourism activity, the reduction in global demand and lower business and consumer confidence.
New Zealand's real GDP growth rate is forecast to decline from 2.8 per cent in the year ending June 2019 to -4.6 per cent in the year ending June 2020, driven by an expected quarterly decline in GDP of over 20 per cent in the June 2020 quarter. Annual real GDP growth is forecast to become positive from the year ending June 2022 (Figure 9). Unemployment is forecast to increase significantly, peaking at 9.8 per cent in the September 2020 quarter before recovering thereafter (Figure 10).
Figure 9 - Real GDP growth
Source: The Treasury, Stats NZ
Figure 10 - Unemployment rate
Source: The Treasury, Stats NZ
The Treasury's economic forecasts were finalised on 17 April and incorporate only $35 billion of discretionary fiscal support, compared to the full $62.1 billion of COVID-19 fiscal support included in the fiscal forecasts, which were finalised on 23 April. The economic outlook chapter of the Treasury's 2020 Budget Update considers how the economic outlook may change when the full amount of COVID-19 support is incorporated.
The unfolding nature of the crisis and the challenges in predicting the depth and duration of the COVID-19 pandemic means that the economic outlook is highly uncertain and forecasts will change as more information comes to light. The forecasts should therefore be read in conjunction with the alternative scenarios in the 2020 Budget Update.