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 2021 and the Wellbeing Approach” chapter constitute the Fiscal Strategy Report required by the Public Finance Act 1989.
The economic outlook
New Zealand's economy is recovering strongly from the COVID-19 pandemic
New Zealand's recovery from the biggest contraction in our history has been quicker than expected, supported by the strong and early response from the Government to save the lives and livelihoods of New Zealanders. Despite some volatility in the data, New Zealand compares favourably to other developed countries (Figure 7 and 8).
The global recovery is also under way, though risks remain
Globally, the pace of the recovery has also surprised on the upside. The actual contraction in global GDP in 2020 turned out to be less severe than forecast by the International Monetary Fund (IMF) in October last year, while the growth rate for 2021 has been upgraded. The availability of effective vaccines against COVID-19 is helping the gradual lifting of mobility restrictions. The pace of the recovery is closely tied to progress in vaccination programmes and their effectiveness against new strains and is therefore expected to be uneven across countries. Third and fourth waves of the virus continue to have an impact across the world, causing further uncertainty and volatility.
Figure 7 - Change in GDP from December 2017 to December 2020
Figure 8 - Real GDP outturns for selected economies
New Zealand's strong recovery is expected to continue
The Treasury forecasts annual average real GDP growth of 2.9 percent in the year ending June 2021, rising further to 3.2 percent and 4.4 percent in the following years (Figure 9). Higher business and consumer confidence levels in New Zealand are forecast to boost investment and spending, with the economy further supported by the continued fiscal and monetary policy response. As global vaccination rates rise, international travel is forecast to gradually return to normal.
Figure 9 - Real GDP growth
Sources: The Treasury, Stats NZ
Figure 10 - Unemployment rate
Sources: The Treasury, Stats NZ
The Government's Wage Subsidy Scheme, which supported nearly 1.8 million jobs by helping people to stay connected to their employers, helped to prevent a rapid increase in unemployment. At this time last year, the unemployment rate was forecast to peak at close to 10 percent. In reality it increased to only 5.2 percent in the September 2020 quarter, before declining to 4.9 and 4.7 percent in the December and March quarters respectively. The Treasury expects the unemployment rate to rise slightly in the near term, before declining to 4.2 percent by 2025 (Figure 10).
There remains a high degree of uncertainty around the trajectory of the economic recovery. Key risks include the spread of more transmissible strains of the virus globally, new waves of infection and the pace and effectiveness of vaccination programmes. The Economic Outlook chapter of the Treasury's Budget Economic and Fiscal Update 2021 (Budget Update) considers alternative scenarios for the economic outlook.