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IPS & IPANZ Seminar The 2009 Budget and Macroeconomic Outlook

IPS & IPANZ Seminar The 2009 Budget and Macroeconomic Outlook. Jean-Pierre De Raad (NZIER) & Derek Gill (IPS) 2 June 2009. Part 1 – Comments on Budget 2009. Macroeconomic Context NZ Macroeconomic Outlook Fiscal Strategy & Outlook Emergent Strategy?

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IPS & IPANZ Seminar The 2009 Budget and Macroeconomic Outlook

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  1. IPS & IPANZ SeminarThe 2009 Budget and Macroeconomic Outlook Jean-Pierre De Raad (NZIER) & Derek Gill (IPS) 2 June 2009

  2. Part 1 – Comments on Budget 2009 • Macroeconomic Context • NZ Macroeconomic Outlook • Fiscal Strategy & Outlook • Emergent Strategy? Part 2- Macro Impact of Fiscal Stimulus

  3. Macro Context –’Horns of a dilemma’ • “the global economy is experiencing the deepest most synchronised recession since the 1930s” (2009 Budget ES P1) • Consensus Trading Partner Growth Forecast (2009-11 Calendar AAPC) –2.5%,+1%, +2.2% • Perfect Storm – Inventory Cycle, Credit Crunch, Asset Price falls • Sharpest Real Economy/ inventory cycle since the 1930s e.g. Q1 2009 first (non war) fall world trade volumes, Japanese exports fell 26% and RGDP 15.2% (apc). • Financial Crises trigger prolonged recessions – output 9% fall over 2 years, 35% fall in house prices over 6 years (Reinhart & Rogoff: 2009: AER P&P) • Stock Market Crashes (+25%) go with 30% chance of major recessions (10%+ falls in RGDP) and 11% chance of depression (25%+ fall in RGDP) (Barro: 2009: NBER WP 14760)

  4. NZ Macro Outlook- ‘Between a rock and a hard place’

  5. NZ Macro Outlook- ‘Between a rock and a hard place’ • Comparison with other forecasts

  6. How does the current recession compare with previous recessions?

  7. Fiscal Strategy & Outlook – Balancing the short & medium term?

  8. Fiscal Strategy & Outlook – Balancing the short & medium term? • Revised Long term debt objective (new net debt peaks at 40% GDP aimed at 30% 2020s) • Cf 20% Gross Debt ratio & NZSF (2008 Budget P48) • Reduce future operating allowances increases to $1.1b. from 2010 (from $1.4b in 2009, $1.7 previously) • Delay 2010 & 2011 tax cuts • Suspend NZS contributions until surpluses

  9. Trends in the key fiscal aggregates (%GDP) • Core Revenues stable around 32% despite tax cuts • Core Current Spending increase from 32% (2008) to nearly 37% (2010-2012) • Operating Balance (ex NZSF, accy + /-) • +3% (2008) -5% (2010-2133) • Large deterioration in new net core debt from +6% in 2008 to 2013 : Central -30.9 Rosy -22.5% Gloomy -50%

  10. Trends in Sector Shares (%NGDP) • Where is 5% growth in core spending in 2008/10 • Social Welfare – 2% ($1.7b in 2010 only) • Health - 1% ($1.0b in 2010 only) • Education – 0.8% ($0.3b 2010 only ) • Law & Order – 0.5% ($0.15b 2010 only) • Other – eg Defence – 0.2% ($0.1b 2010 only ) • Nominal GDP broadly flat – 2008 – 2011 • How will a 1.7% increase ($1.1b) be managed in 2011? • How will long term trend growth in the big four be managed?

  11. Emergent Strategy? • Task forces on Tax, Infrastructure, Electricity etc. • “Predictable, pragmatic, if unexciting” • Budget emphasised infrastructure spending and sustaining income support, health and (non tertiary) education, law and order What will second term issues be: • NZ Super – 66% at 65? • Improving system performance eg health • Gloomy or Rosy Scenario?

  12. Macro impacts of the fiscal stimulus IPS/NZIPA lunchtime seminar 2 June 2009

  13. Supporting jobs one of three objectives in budget

  14. $10b fiscal stimulus package pre budget 09 • fiscal impulse indicator of 5.4% of GDP $b

  15. Sagging income puts dent in tax revenues

  16. Tax rises & spending cuts to curb rising debt

  17. Fiscal stimulus supports jobs % deviation from base case

  18. But it has to be paid back % deviation from base case

  19. Stimulus does not help external imbalance

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