Auckland, July 24, 2024 – At a high-profile guest lecture held at the Cordis Auckland, the Treasury’s Chief Economic Advisor, Dominick Stephens, delivered an in-depth analysis of the Budget 2024 Economic and Fiscal Update.
The event, organized in partnership with theAuckland Business Chamber and introduced by CEO Simon Bridges, focused on the Treasury’s current forecasts and the shifting structural foundations of the New Zealand economy. Stephens’ presentation centered on three critical pillars that underly the nation’s financial strategy: economic forecasts, fiscal indicators, and productivity trends.
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Economic Forecasts: A Cautious Recovery
Stephens outlined the Treasury’s position on both the international and domestic economic outlook, noting that New Zealand is currently in a period of “rebalancing.”
- Global Context: With global uncertainty high, New Zealand’s growth is heavily influenced by international trade conditions and inflation trends abroad.
- Domestic Outlook: While GDP was forecast to contract slightly by 0.2% in the year to June 2024, Treasury expects a gradual strengthening from the second half of the year. This recovery is supported by easing inflation and the Budget 2024 tax package, which aims to bolster private sector incomes.
- The “Soft Landing”: The forecasts suggest inflation will fall below 3% by late 2024, allowing for a gradual reduction in interest rates, which is vital for stimulating household spending and residential investment.
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Fiscal Indicators: Tracking the Path to Surplus
The presentation detailed the implications for aggregate fiscal indicators, which serve as the primary metrics for the government’s financial health.
- Revenue and Deficits: Stephens highlighted that the OBEGAL (Operating Balance before Gains and Losses) deficit is expected to remain elevated in the near term, reaching $13.4 billion for the 2024/25 year. This is largely due to lower-than-expected tax revenue and persistent high core Crown expenses.
- Debt Trajectory: Net core Crown debt has risen to approximately 42.5% of GDP. The government’s long-term fiscal strategy involves reducing this below the 40% threshold.
- Fiscal Discipline: Stephens explained that the path to a surplus (projected for 2027/28) is now slower than previously estimated, requiring a “contractionary” fiscal impulse—meaning tighter government spending—to avoid adding to inflationary pressures.
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Productivity Trends: Addressing the Structural Slowdown
Perhaps the most significant portion of the lecture involved the recent downward revisions to the Treasury’s productivity forecasts.
- The Productivity Paper: Referencing a recent Treasury Paper, Stephens explored why productivity growth has been sluggish globally and locally since 2007.
- Key Drivers: The slowdown is attributed to several factors: weak investment relative to employment growth, lower benefits from innovation, and a cooling in international trade connections.
- Impact on Living Standards: Stephens emphasized that because sustainable improvements in living standards are tied directly to productivity, these downward revisions are a major concern. “Working smarter” is essential, as New Zealand can no longer rely on simple population growth to drive its economy.
The seminar concluded with the perspective that Budget 2024 is a “challenging” transition. By aligning Economic Forecasts (growth), Fiscal Indicators (the government’s books), and Productivity Trends (the efficiency of the workforce), the Treasury aims to provide a realistic roadmap for New Zealand’s future. The core message was clear: while the short-term focus is on cooling inflation and stabilizing debt, the long-term prosperity of the country depends on reversing the productivity slowdown and maintaining strict fiscal discipline.