Macroeconomic adjustments in the current crisis.
New Zealand's economic fortunes have reversed rapidly. It was a beneficiary of the past decade's global growth surge, in particular China's rapid expansion, which pushed up the prices of its commodity exports and lowered those of its manufactured imports. On the financial side, the global "savings glut" meant capital was readily available to fund a shortfall in domestic savings. In conjunction with interest rates that were not unduly high by domestic historical standards, but attractive to international investors, the availability of capital facilitated a housing and consumption boom. New Zealand is now being severely affected by the reversal of this supportive atmosphere: commodity prices have fallen and export markets have shrunk, while the supply of foreign credit has tightened and the external deficit is still very large by international standards. Macroeconomic policies, fortunately, are in a good position to help, although "exit strategies" are still ill-defined, as elsewhere. Deposit guarantees are being offered for the first time in the country's history, but they will need to evolve to manage moral hazard. Fiscal policy is more expansionary than in most other OECD countries, an option made possible by the government's robust financial position when the downturn began. However, the nation's high external debt will increasingly limit its scope to borrow and spend. Monetary policy has already provided significant stimulus and some further, more modest easing, is expected. The Reserve Bank has had more room to cut policy interest rates than other central banks but, as elsewhere, may eventually run the risk of keeping them too low for too long, although these risks are reduced insofar as the recovery is expected to be somewhat L-shaped (i.e. anaemic growth over an extended period).
The domestic repercussions of fierce global shocks
New Zealand recorded a strong increase in its output and income levels over the past 14 years, its real GDP rising on average by 3 1/2 per cent per annum notwithstanding fall-out from the 1997 Asian crisis. The long expansion was underpinned by a confluence of factors:
* deep structural reforms and fiscal consolidation that boosted per capita potential growth;
* strong labour income growth as a result of rapid working-age population growth (largely due to high net immigration), a rising employment rate and cyclically-high wage growth in response to low unemployment;
* rapid expansion of export markets and particularly rapid gains in relatively-nearby China; * booming commodity export prices (notably for dairy products) and the availability of cheap manufactures from China, resulting in strong terms-of-trade gains, a key source of per capita income growth;
* a housing boom kicked off by easy credit and record immigration in a context of a structural shortage of homes; and
* an ample supply of global savings, giving borrowers ready access to credit for consumption and investment at domestic interest rates that were not overly high by historical standards.
But the large inflow of capital put upward pressure on the currency. This, together with buoyant domestic demand and rising payments abroad to service debt, led the current account deficit to widen substantially.
The ground began to shift in 2007. The international oil price rose sharply, while sustained high domestic growth put heavy pressure on capacity, intensifying skill shortages and wage and price inflation. Monetary policy tightened further, and the housing market responded with slowing capital gains, while the exchange rate finally peaked. A severe drought struck at end-2007, curtailing supply in the critical hydro electricity and farm sectors. In early 2008, the country entered a largely home-grown recession, which left it in weakened condition when the international financial crisis intensified later in the year (Figure 1.1, Panel A). Growth was negative in all four quarters of 2008 and, according to OECD projections, is likely to remain so through 2009, resulting in the longest recession in New Zealand's modern history. Only modest increases in output are expected over the following 12 months or so, with faster recovery likely to be delayed until mid-2011 (Table 1.1).
The global crisis is affecting New Zealand through both demand and finance channels. Subdued global growth is damping export volumes. The Chinese market, itself afflicted by collapsing US demand, is a particularly important one for New Zealand. The reversal of the commodity boom in the second half of 2008, particularly lower prices for dairy, is cutting into rural cash flow and incomes, with significant negative impacts on the rest of the economy. (1) As NZ companies are either directly or indirectly reliant on offshore capital to fund investment, the global credit contraction is hitting them through tighter borrowing terms and difficulty in obtaining new finance from banks, debt and equity markets. The negative effect on investment would be exacerbated if access to international capital became more severely curtailed. The difficulty of continuing to finance the large external debt if foreign investors were to become significantly more risk averse is perhaps the greatest risk to the economy. Households' demand for credit has fallen very sharply, and they also face a reduced supply of credit as a result of tightened lending criteria. Together, these developments are restricting consumption and, especially, residential investment. The housing market has led the downturn. House prices have fallen by about 15% in real terms so far from their peak, resulting in a shutdown of mortgage equity withdrawal, which had helped to feed the earlier consumption boom. (2) Consumption will shrink for a time and then grow only hesitantly until household balance sheets are satisfactorily repaired. Weak consumer and foreign demand will impair business profitability and result in lay-offs and further investment declines. Rising unemployment and attendant job insecurity will add to consumers' income losses and propensity to save. Slowing wage growth is also likely to result from greater labour-market slack. The banks (and their Australian parents) are in relatively good shape. The parents have been able to raise additional capital without deep discounts to their share prices. But this could change if house prices depreciate by more than the expected 20-25% in real terms.
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Corrective mechanisms are in place. Last year's drought has ended, providing a near-term fillip to production (i.e. avoiding an even sharper decline). As demand weakens, cheaper oil and lower price inflation more generally will shore up consumers' purchasing power (even if much of it goes to reducing dis-saving rather than consumption). The lower exchange rate, which has depreciated by some 30% on a trade-weighted basis from its July 2007 peak, will enhance investment incentives in tradable-goods sectors and allow exporters and import-competing firms to capture market share. Major policy support is also being extended. Corporate and personal income tax cuts are providing substantial underpinning (see below). Concurrently, policy interest rates have come down sharply, with a large portion being passed through to mortgage lending rates, providing relief to indebted households. Further, though more modest, interest rate cuts would be appropriate, given the anticipated large negative output gap. However, policy settings should begin to be normalised relatively rapidly once the recovery gets firmly underway in order to keep annual CPI inflation in the target band (currently 1-3%). The projections, which are keyed to the global recovery expected to be kicked off by the United States, suggest that the tightening cycle will not begin before 2011.
The global crisis is in part a structural shock that will require long overdue macroeconomic adjustments. The financial systems in the United States and much of Europe, and households in countries like the United States, the United Kingdom, Australia and New Zealand, lulled by too easy money and a general underestimation of risk, became overleveraged because of widely held expectations that housing and other asset prices could not fall. In New Zealand's case, these forces were reflected in household demand-led growth, rapid credit increases across all main sectors of the economy and rising current account deficits, the counterpart to high national saving and sizeable current account surpluses in China and other countries enjoying export-led growth. These trends aggravated already present currency and funding risks because the current account deficits were almost entirely funded through additional heavy short-term bank borrowing abroad. Households, whose wealth was increasing while asset prices went on rising, stopped saving and were living well beyond their means. In the short term, budget deficits will expand to sustain demand. The deterioration in New Zealand's public finances may be large, with a shift from surplus to deficit of around 10 percentage points of GDP between 2007 and 2010. The parallel build-up of external public debt will partly fill the room vacated by the decline in household indebtedness. The next section investigates the macroeconomic imbalances and their adjustments in more detail.
The macroeconomic imbalances
New Zealand's economy suffers from significant macroeconomic imbalances. The current-account deficit doubled to 8.9% of GDP in the five years to 2008 (Figure 1.1, Panel B). During the same period the country's net international investment position (NIIP) has gone from a negative level equivalent to around 75% of GDP to 93% of GDP at end-2008 (Figure 1.1, Panel E). Large external imbalances are reflected in both short- and long-term real interest rates, which have been higher than in other OECD countries for many years (Figure 1.2). The large external deficit--and perhaps the negative NIIP itself--is disquieting because it is almost certainly not sustainable at its current level. As an indication, with nominal GDP growth of 6% per annum (about what New Zealand has had since 2000), the ongoing current-account deficit consistent with a long-run NIIP stable at -100% of GDP is only 5.7% of GDP (Edwards, 2007). Assuming a very plausible lower nominal GDP growth of 5% per annum, stabilising NIIP at a somewhat lower 80% of GDP (still high by international standards) would require a current account deficit of 3.8% of GDP, more than 5 percentage points lower than it is today.
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Housing and current-account sustainability
Over the 2000 to 2008 period, house prices were rising fast, at one point by more than 30% per year, approximately doubling in nominal terms (Figure 1.3). From 2000 to its peak eight years later, the average house-price-to-income ratio rose more in New Zealand than in any other of 18 OECD countries for which comparable figures exist (Figure 1.4). Rising house prices boosted the perceived wealth of home-owners and underpinned very strong consumption and residential investment spending, reversing the trade account surplus of the early 2000s when the currency had been overvalued (Figure 1.1, Panel B). Residential investment increased from 5% to close to 7% of GDP before falling again, and household mortgage borrowing also rose sharply (Figure 1.3). Banks borrowed abroad to fund this domestic credit expansion: from 2001 to 2008, close to 80% of the increase in the net international liability position happened in the "financial and insurance services" industry.
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Households' expectations of capital gains from housing were strong and underpinned by a buoyant labour market. Many apparently saw scope to unlock recent capital gains--by borrowing more against their home equity--and still expected house prices to rise sufficiently over the long run to meet their savings goals. They thus saw little need to save out of current income. The result was a steep plunge in the household saving rate, which had already been negative since 1993 (Figure 1.5). Households have been officially estimated to be dis-saving to the tune of as much as 15% of income per annum, the lowest saving rate of any OECD country except Greece. New Zealand households have thus increased their dependence on property assets in their balance sheets (Table 1.2). Many now hold essentially no other assets. Thankfully, the government and the business sector have had much better saving records, though the business sector greatly increased its leverage in recent years, and the government's position is expected to deteriorate quickly in the future (see below).
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Correcting imbalances: sudden or gradual?
Gradual moderation of the imbalances, the likelier scenario, would not pose significant economic problems. A brutal reversal associated with a sudden stop in capital inflows, however, would be much more costly. An abrupt adjustment would most likely take the form of a precipitous change in foreign investor sentiment, leading to a further sharp depreciation of the New Zealand dollar, higher inflation, heavy labour shedding and, probably, higher interest rates. The risk of a painful adjustment is and will remain material as long as international credit markets remain fragile and the current-account deficit is not brought onto a more sustainable footing. Some ratings agencies agree. In January 2009, Standard and Poor's revised the outlook for the currency's long-term rating (AA+) from "stable" to "negative", citing "narrowing policy flexibility due to external imbalances, especially the current account deficit". It also said a downgrade could occur if the new government does not provide a credible plan to reverse the deteriorating fiscal outlook and reduce external imbalances in the May budget.
The transition to a lower and more sustainable current-account deficit requires increasing domestic saving, especially since coming to terms with the longstanding productivity challenge is likely to require more investment over time. To the extent that some of the effects induced by the international credit crisis prove durable, some of the necessary corrections have already started. Lower housing wealth stemming from less inflated house prices should push up the household saving rate. A lower exchange rate should both reduce consumer spending and prompt expenditure switching away from imports towards locally produced goods and services, as well as increased exports. Both trends will help shrink the current-account deficit. By end-2010, it is projected to have shrunk by some 3 percentage points of GDP from its 2008 peak.
Monetary policy and financial-market supervision before, during and after the financial crisis
Unlike in many other OECD countries, New Zealand's major banks, all Australian-owned, are in relatively good shape. They have not been greatly involved in many of the complex financial products resulting from securitisation that have caused significant losses for many large global institutions, nor were they heavily exposed to bad assets directly (Figure 1.6, Panel C). For instance, most mortgages are kept on the balance sheet of the lending institution, and less than 1% are funded through mortgage-backed securities. Accordingly, there has been no need for nationalisation nor capital injection into the financial system by the public sector, and there has been no failure, threatened or actual, of any large financial institutions.
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Only relatively small finance companies that were involved in riskier lending have gone out of business. After several years of very strong economic growth and a benign lending environment, risk management in these institutions was being sidelined. Compounding the problem was the lack of regulation around second- and third-tier lenders. As the Reserve Bank tried to contain inflationary pressures by progressively raising interest rates, the weakness of certain business models started to be revealed (including cases of fraud). A number of institutions faced funding difficulties and were beset by problems of poor asset quality, related-party lending and inferior credit management, which had not been apparent in more favourable economic conditions. A large number of these finance companies (around 40) have now gone bust, but their failing did not pose systemic risks as they were all relatively small players. Generally, however, and with appropriate regulation, OECD work shows that second- and third-tier lenders can be important to bank competition, so entry in this sector should not be discouraged.
Banking sector concerns and immediate policy responses
The banking system is, however, very reliant on non-resident funding sources, a situation reflected in the country's high external indebtedness and, therefore, the ongoing capital account surplus (Figure 1.6, Panel D). This makes banks vulnerable to shifts in the global cost of credit and risk appetite. As a result, they started being affected when trust vanished between financial institutions across the globe. This has mainly taken the form of higher spreads on their foreign borrowings and an inability to fund much beyond three months (Figure 1.6, Panel A). Because foreign borrowings are almost all hedged back into New Zealand dollars, however, the overall cost of funds has fallen dramatically as the Reserve Bank cut its official cash rate (OCR) from 8.25% in July 2008 to 3% in March 2009.
Recognising the need to ensure the availability of liquidity for the banking sector, the Reserve Bank and the government have taken a number of steps. (3) First, in May 2008, the Bank relaxed the securities test for access to its discount window. It agreed, for example, to take other banks' bills as collateral for a slightly higher spread, as well as highly-rated mortgage-backed securities created for the purpose. These measures were meant to ease liquidity pressures that were threatening to increase the spread between the OCR and the overnight inter-bank cash rate and undermine bank confidence in the future availability of funding, which could have threatened the ongoing supply of credit. Second, in October 2008, the government introduced an optional two-year deposit-guarantee scheme open to all (bank and non-bank) deposit-taking institutions. With Australia, New Zealand had previously been one of the only two OECD countries without such a scheme. However, the fees for each individual institution are not high enough to match expected future payouts. (4) The retail deposit guarantee was designed to mitigate the risk of bank runs and minimise capital flight to Australia, which had just moved to protect deposits. But since retail deposits account for just 44% of banks' total funding, this guarantee did not, by itself, ensure the stability of the financial system. Wholesale sources account for the other 56% of banks' funding, with most of this coming from foreign wholesale markets (Table 1.3). Significant concern about the ability of New Zealand's banks to source funds on wholesale markets thus remained, especially given an environment where many other countries were guaranteeing their banks' wholesale funding. Third, in November 2008, the government announced a temporary guarantee of wholesale borrowing by investment-grade financial institutions (with a BBB credit rating or higher) that choose to opt into the scheme. Institutions will be charged a fee, which will depend on their credit rating and the term of the security being guaranteed. Unlike the deposit guarantee scheme, fees are expected to cover losses. As of 11 March 2009, three of the four major financial institutions (ANZ National Bank Limited, Bank of New Zealand and Westpac New Zealand Limited) had been approved for the wholesale guarantee. Fourth, the Reserve Bank, in collaboration with the US Federal Reserve, established a temporary reciprocal currency arrangement (swap line) to address elevated pressures in US dollar short-term funding markets. The facility, authorised to 30 April 2009 but unused so far, would support the provision of US dollar liquidity to the New Zealand markets in amounts of up to USD 15 billion.
All these measures have helped shore up confidence in the New Zealand banking sector, which remains in relatively good shape compared to many other countries. Profitability has taken a hit, and the weakening agricultural and corporate sectors heighten credit risk, but the banks are sufficiently capitalised and appear well positioned to absorb normal cyclical credit losses (Figure 1.6, Panel B). While systemic risks appear small, the recent freeze in short-term wholesale funding markets has underscored the importance of better funding structures, including regulation that addresses the long-standing concern about liquidity and refinancing risks in the banking system. This concern relates to the substantial net international liabilities, mostly comprising bank borrowing, much of which at short-term maturity (up to 90 days) (Figure 1.7). As most external borrowing is done in domestic currency or hedged back into New Zealand dollars, it is not subject to significant valuation effects associated with exchange-rate changes. This markedly reduces the risks around offshore borrowing. In an environment of more acute risks, however, the stability of these capital inflows and the availability of counterparties for foreign-exchange hedging cannot be taken for granted. And because capital inflows are largely intermediated through the banking sector, pressure for their reduction would be felt most immediately in the form of refinancing difficulties in short-term offshore bank funding markets.
Lessons for banking and financial-market supervision
Like other countries, New Zealand may benefit from taking a more explicit macro-prudential approach to financial stability. On the regulatory side, a macro-prudential approach would aim to strengthen resilience in the financial system by designing standards and codes to limit the build-up of financial and economic imbalances. Perhaps the first step in implementing such a regulatory approach to risk management is to revise bank capital requirements. New Zealand's banks have typically not been constrained by regulatory capital requirements, as they tend to hold capital well in excess of regulated levels, but global experience suggests that capital buffers can evaporate quickly. Locally incorporated banks (which include all the large ones) have been required to hold capital based on Basel II requirements since the first quarter of 2008. But the concern is that these new requirements would encourage higher leverage when times are good and hasten deleveraging in a downturn, thus exacerbating the slowdown and raising the risk of negative feedback between the financial system and the real economy. Bank capital requirements should be designed to counter, not reinforce, the natural tendency to procyclicality. They should encourage institutions to build healthy levels of capital reserves during good times, for use in bad times. New Zealand has put considerable effort into trying to ensure that capital requirements are based on through-the-cycle loss probabilities. Also, the Basel Committee on Banking Supervision is currently working on ways to amend the current guidelines. Under the revised Basel approach, counter-cyclical capital ratios should be used to both restrain excesses during upswings and provide a cushion to moderate the following downturns when they do eventually materialise.
The financial crisis has exposed weaknesses in bank liquidity regulation, so another step in ensuring the longer-term stability of the financial system is to implement minimum liquidity requirements. The Reserve Bank released a draft liquidity policy in October 2008 and, following public consultation, will move to implement it. This policy supplements the existing approach, in which banks must publish their risk-management policies and certify their adequacy, with rules and guidelines on how the Reserve Bank expects banks to address liquidity-risk management. The proposed rules include minimum liquidity requirements and seek to extend the maturity of bank funding to reduce short-term exposure. More precisely, the main components of the proposed liquidity policy are: limits on a bank's mismatch positions over one week and one month; a minimum "core funding" ratio; identification of some required elements in banks' internal liquidity-risk management arrangements; greater specificity on the required content of public disclosure; and required reporting to the Reserve Bank on a limited set of important indicators of liquidity and liquidity risk (Reserve Bank of New Zealand, 2008b). The intent is to ensure that banks meet some minimum standards, while still allowing flexibility as to how they meet them. Banks will be allowed a transition period to adhere to the new liquidity policy, with full compliance required by the end of 2010.
On the supervisory side, a macro-prudential approach would assess threats to financial stability by looking at the broad economic and financial conditions that can contribute to a build-up of risks to the financial system and to the economy as a whole. This requires greater co-operation between the supervisor and individual institutions to design and implement robust risk-management practices that are grounded in a longterm, through-the-cycle perspective, along with appropriately designed stress tests. As noted above, capital requirements are already based on a through-the-cycle approach. Furthermore, stress tests carried out by the Reserve Bank--for example its risk-weight outcome for the housing sector--have been tougher than the international norm, as set out for instance in the joint International Monetary Fund/World Bank Financial Stability Assessment Program (International Monetary Fund, 2004). This does not suggest room for complacency, however. International norms will no doubt be refined and New-Zealand practices should evolve along with them. To monitor their regulatory capital requirements, New Zealand banks may, if accredited, use the internal-model approach, and several of them have been approved to do so. All of them are expected to apply for and eventually use it. As institutions develop these and other risk-management models, the Reserve Bank should continue to take a proactive approach to help them take into account the collective impact of their individual choices. For instance, by continuing to run co-ordinated macroeconomic stress-test scenarios, it can observe the details of risk-management systems at individual institutions, identify possible feedbacks that are missing in these systems and draw out the implications for bank capital.
The introduction, sometimes rushed, of temporary support programmes has created a need, common to many OECD countries, to design exit strategies. In New Zealand this means thinking about whether, when and how to retreat from wholesale and retail deposit guarantees. When governments guarantee assets or liabilities, they distort competition among companies within and between countries, and financial-market distortions emerge. There is also a danger of a swing to the other side: with government support the private-sector cost of capital may become too low if investors believe recent actions demonstrate that support for capital, assets and deposit liabilities will always be there. The government's willingness to pull out of these interventions is strong, because of the moral hazard they engender, but normalisation will be difficult for New Zealand and will depend on how and when other countries decide to retreat, especially Australia. The wholesale deposit guarantee should be retired as soon as feasible when financial market conditions normalise. But the retail deposit guarantee may be trickier to retire because most other countries, which already had deposit insurance before the crisis, can be expected to keep theirs. Instead of eliminating it, one option would be to convert it into an insurance scheme with risk-based insurance premiums that cover the full actuarial costs of insurance (see Chapter 2).
The financial crisis has reminded market participants and regulators alike of the extent to which financial markets are globally integrated, and of the importance of co-ordination among countries in resolving crises. In New Zealand all major banks are wholly owned, locally incorporated subsidiaries of Australian banks, so banking sectors on each side of the Tasman are very much integrated. The Reserve Bank recognises the principles underlying the Basel accords that the home country should supervise on a consolidated basis and the host country is responsible for supervision of the operations in the host country. Accordingly, the Reserve Bank works with the Australian Prudential Regulation Authority (APRA) to improve regulatory co-ordination under this home-host model. A number of complex questions around how supervisory and intervention authority would be shared between the two countries would need to be resolved if a major New Zealand bank were to become insolvent or substantially weakened. Amendments were introduced to the Reserve Bank of New Zealand Act in 2006 to facilitate the coordination of home- and host-country banking supervision between the two nations, particularly in a crisis situation, and the trans-Tasman banking council is currently working on improving guidelines for crisis management. These guidelines should include clear, consistent and co-ordinated bank-rescue policies between the two countries, as well as a credible option of allowing banks to fail to limit moral hazard.
The financial crisis has also pointed to the need for better supervision and regulation of non-bank financial market players. As stated previously, New Zealand has seen the failure of many small finance companies, some of which accepted deposits. In addition to its traditional role in banking supervision, in September 2008, it was decided that the Reserve Bank should assume new regulatory and supervisory functions for all non-bank deposit-taking institutions. Thinking about re-regulating this sector had been ongoing for a few years. The new framework includes capital adequacy ratios, liquidity requirements, restrictions on related-party lending and governance requirements. Non-bank deposit takers will have to be licensed by the Reserve Bank, will need to have a risk-management programme in place and will be required to disclose more information to investors. For instance, registered deposit takers will be required to publish six-monthly "key information summaries" that contain financial and prudential information to assist prospective investors in making informed decisions. They will also be required to obtain and disclose a credit rating from an approved rating agency (unless their total assets are below a certain threshold, in which case they must publicly disclose their exemption).
Besides aggravating external imbalances, the prolonged housing cycle placed additional pressure on inflation, as rising household wealth stimulated domestic demand. In addition, rising terms of trade and a historically elevated exchange rate placed considerable pressure on sectors of the economy that are heavily exposed to international competition. The Reserve Bank found itself in a difficult position. Restraining inflation required high OCRs, up to 8.25% at the peak, and even at these high cash rates inflation was tracking above or in the upper reaches of the target band and inflation expectations were rising (Figure 1.8). But increasing interest rates encouraged further capital inflows, adding to upward pressures on the currency and risking further damage to the tradables sector. When the financial crisis started, the Reserve Bank had more room to cut rates than other OECD central banks. After progressively taking the OCR down from 8.25% to the current 3%, the carry trade (international uncovered interest-rate arbitrage) has now mostly if not entirely been washed out of the currency, and the monetary stimulus is reinforcing already significant macroeconomic stimulus coming from fiscal policy. Some further stimulus may be required. If so, monetary policy should take priority over fiscal policy, because the OCR is still well above the zero lower bound, and systemic/structural problems in New Zealand's financial system do not seem to be a large impediment to monetary transmission (Figure 1.9). On the other hand, given New Zealand's reliance on overseas savings, a nominal interest rate above zero may be needed to attract the capital necessary to fund the current account deficit. The high debt levels and the New Zealand dollar's lack of reserve-currency status may constitute a significant constraint on the Reserve Bank's ability to provide further liquidity, should it be needed, without destabilising the exchange rate. Moreover, lags in the transmission mechanism make it important for the Reserve Bank to start raising rates once a recovery is clearly underway to anchor inflation expectations around 2% over the next cycle. Historically, an OCR below 5% has stoked capacity tightness and inflation pressures.
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Worries around macroeconomic volatility and particularly the impact of the exchange rate on the tradables sector--stemming from a view that limiting inflation relied too much on the OCR--prompted an Inquiry into the Future Monetary Policy Framework by Parliament's Finance and Expenditure Select Committee. This followed an earlier review by the Treasury and the Reserve Bank into possible supplementary stabilisation instruments to assist monetary policy in managing the cycle. The conclusions from the Select Committee were released in September 2008. Their thrust is reasonable: the monetary policy framework is fundamentally sound, and factors other than monetary policy, such as sustained improvements in trend productivity, can play a key role in lessening the pressure on monetary policy to effect the economic adjustments required to maintain inflation in the target range. Because of the perception that the excesses of the recent cycle were rooted in the housing market, the Inquiry considered options that would directly affect the housing market or the market for finance secured on residential property. It pointed out that measures to increase the speed at which new land and houses could to be brought onto the market in response to rising demand could damp inflation pressures in a future upward housing cycle. Empirical evidence shows that house price cycles are less pronounced in areas where supply is able to respond quickly (Green et al., 1995; Glindro et al., 2008). To this end, the government should consider streamlining regulations and planning laws regarding the provision of housing.
Although the Inquiry came to the conclusion that supplementary stabilisation instruments were not warranted, it invited the government to consider whether existing prudential legislation unduly restricts the Reserve Bank's capacity to respond to inflation with its prudential tools. The worldwide financial crisis has now re-focused policy makers' attention on these issues and on the Bank for International Settlements Basel II agreement. As argued above, bank capital requirements should be better linked to cyclical risk. Though the main aim of such measures would be to ensure that banks have sufficient capital to cope with downturns, any damping effect on lending would reduce inflation pressures as well. Finally, the Inquiry supported a recommendation made in previous OECD Surveys on ensuring a neutral tax system with regard to all forms of capital investment (OECD, 2007). Without being the only source of the recent housing market cycle, some features of the tax system, such as the non-taxation of capital gains on housing, may have accentuated the housing boom, with any incentive effect accentuated by the high top marginal tax rate (39% at the time). The desirability of this and other features of the tax system should be re-examined (see Chapter 2).
Fiscal policy in the crisis and beyond
With a low level of gross public debt and a positive net asset position, New Zealand has enjoyed significant fiscal policy flexibility in recent years. However, the impact of the recession on nominal GDP and a lower post-recession GDP path imply a permanent negative revenue shock. Government spending will need to adjust in line with declining revenue or else enduring fiscal deficits and steadily increasing public debt will result. While the projected debt path (some 40% of GDP by 2013 and 80% by 2023 in Treasury's latest downside scenario) is not unduly high compared to some other OECD countries, it has to be seen in the context of New Zealand's high overall external indebtedness and heightened global risk aversion. With massive new issues of sovereign debt hitting the markets simultaneously as governments almost everywhere expand deficits, the NZ government could find itself well down the funding queue if the sound fiscal position underpinning New Zealand's strong credit rating were to be impaired. Hence, fiscal expansion is probably already at the limits of prudence, and should go further only in extremis, i.e. in the case where monetary policy becomes ineffective and the economy still requires further support. The challenge for the May budget is therefore to embark on a credible consolidation path, with measures aimed at restoring fiscal sustainability over the medium run.
Fiscal consolidation will need to be accompanied by structural reforms to assist private-sector adjustment toward export-led growth and higher net saving, thereby not only counterbalancing the build-up of public debt but going further to channel those savings into investment. The government is calling for lower and better targeted public spending, while focusing the stimulus on tax cuts and accelerated infrastructure building, thereby trying to address both cyclical and some structural needs at once. However, longer-term fiscal challenges have been amplified by the crisis, which implies a much weaker fiscal starting point for dealing with ageing and other future pressures on spending. If efforts to regain the former debt path fail, then the need for structural adjustments to pensions, health care and other spending--already considered difficult--will be that much greater.
Sharply deteriorating fiscal balances following a golden age of surpluses
Fiscal policy leading into the crisis
The surplus era (1994-2008) was the result of structural reforms that raised growth, together with fiscal consolidation and improvements to the fiscal framework undertaken by successive governments of both major political persuasions during the 1980s and 1990s. The surpluses were used to pay down debt and then to build up assets in the NZ Superannuation Fund, involving an annual average contribution of 1.2% of GDP since the fund was created in 2003. Short-term interest rates, which had peaked at over 20% in the mid-1980s, fell to around 6% by the early 2000s. The combination of primary surpluses and interest rates falling below the nominal rate of GDP growth gave rise to favourable debt dynamics. By 2006, a positive net asset position (including NZ Super) had emerged and gross debt had fallen by 40 percentage points of GDP since the early 1990s (Figure 1.10). Local government debt increased somewhat (as far as can be estimated), however, so that general government debt declined by only around 30 percentage points of GDP. Nevertheless, the result of this exemplary performance, assisted by then-surging asset valuations in NZ Super, was a positive net asset position as from 2005, and negative net interest payments at the general government level as from 2003, reinforcing the virtuous budget cycle.
[FIGURE 1.10 OMITTED]
The size of government, as measured by cyclically adjusted spending and tax ratios, continued to shrink until 2001. However, the cyclically adjusted tax ratio rose from 40% in 2001 to 4S% by 2006, back to where it had been in the early 1990s (Table 1.4). Part of this "structural" tax increase was indeed the result of deliberate policy, notably a 2001 rise in the top marginal personal income tax, from 33 to 39%, which kicked in at NZD 60 000 (making it the relevant marginal rate for 5% of a11 taxpayers in 2001, but 13% more recently). But a significant part also stemmed from record terms-of-trade gains which boosted corporate and farm incomes over and above the normal output gap effects, though other temporary factors such as asset price bubbles contributed. (5) Table 1.4 shows that terms-of-trade-related tax revenues during 2001-08 were more than double those attributable to the favourable domestic economic cycle. Booming taxes, together with declining interest payments permitted nearly as large an increase in adjusted primary spending (the remainder going to net debt reduction). Higher taxes and a reallocation away from defence and core services funded spending increases in social programmes (e.g. Working for Families), education and health care (see Chapter 3). Structural surpluses rose for a time, though after 2006 these surpluses began to recede, even as the economy remained overheated (Figure 1.11).
The May 2008 budget (for the fiscal year 2008-09) was highly expansionary. Given that gross debt was projected to fall below the 20% of GDP considered prudent by the government, targeting structural balance (after allowance for prefunding) was considered appropriate. Over the budget's multi-year horizon, the cumulative fiscal stimulus provided was nearly 4% of GDP. With the economy turning out to have already been in recession, that stimulus has proved fortuitous ex post. The budget included personal income tax cuts and some spending increases, all together imparting a major boost to demand over the second half of 2008 and in 2009. The "operating allowance" for the years 2009-12, i.e. the annual amount allocated to new operating spending, was kept to NZD 1.75 billion, which implied a rate of growth below that of preceding years as budget room was now smaller. A pre-election budget update in late October 2008 added another 1 1/2 percentage points of GDP to the medium-term fiscal deterioration. This mainly reflected the higher-than-expected costs of earlier spending programmes (greater take-up of Kiwisaver subsidies, 20 hours weekly free child care and settlement of treaty claims). After the 8 November election (which was won by the main opposition party), the budget outlook was again updated to reflect the fast deteriorating economic situation and to take into account personal income tax cuts and accelerated infrastructure spending announced in the new government's stimulus plan. Even though the budgetary cost of the new tax cuts was in large part compensated by a reduction in Kiwisaver subsidies and elimination of the new R&D tax credit, the worsening recession implied a sharp shift in the operating balance from a 3% surplus in 2008 to an officially estimated 3% deficit by 2011 (Table 1.5). The programmed 2009-11 stimulus rose to 7% of GDP (Figure 1.11). (6)
[FIGURE 1.11 OMITTED]
In conclusion, fiscal policy prior to the crisis demonstrated the benefits of a sound fiscal framework, achieving debt reduction and prioritisation of spending, but one that faced inevitable challenges in differentiating permanent from temporary components of revenue gains. The profound structural reform and fiscal consolidation programmes of the 1980s and 1990s supported a dramatic reduction in New Zealand's risk premium, which is important to safeguard. Cyclical conditions during the 2000s would have called for a restrictive policy stance with continued strong surpluses. (7) Only once debt fell to a low level and projections presaged ongoing declines did a zero structural balance (after allowance for pension prefunding) become an appropriate objective. However, current projections suggest the move into deficit has a significant structural component; and projections of a permanently lower GDP path call for lower spending.
Crisis measures and financial repercussions
New Zealand's fiscal stimulus is among the highest in the OECD, whereas the recession's projected trough is only slightly shallower than the OECD average (OECD, 2009). An important question is whether this stimulus will be effective. New Zealand's fiscal multipliers appear to be smaller than those estimated for the larger economies, reflecting greater leakages or crowding out in a small open economy (Barker et al., 2008). There are reasons to believe that the multipliers might have changed. First, the sharp fall in the exchange rate reduces leakage into imports. Second, investment crowding out is not likely to be an issue so long as business confidence and access to credit are moribund, though lack of credit might weaken the multipliers. Third, liquidity constraints among struggling households put a brake on normal Ricardian behaviour (i.e. households saving more in anticipation of the need to pay higher taxes in the future), (8) although, as seen above, desired deleveraging means that the marginal propensity to save will be high. Thus, the overall direction of change is ambiguous.
The composition of the stimulus also matters, spending impulses tending to have a stronger impact than tax cuts. The present stimulus package contains a balanced mix of both (Table 1.6). Accelerated infrastructure spending--if projects with a sufficiently positive cost-benefit ratio can be rolled out quickly enough--should stimulate demand and create employment (and generate positive supply-side effects). Improvements in approval processes through general regulatory reform (such as the rewriting of the Resources Management Act; see Chapter 2) would speed up project implementation. Projects with longer implementation lags may help absorb the spare capacity that is projected to persist for several years. However, excessive haste should not be allowed to impede rigorous cost-benefit analysis and fully transparent procurement and costing procedures. (9) The extra assistance being given to displaced workers is well targeted and clearly reversible, and could be boosted if further stimulus is needed. On the tax side, cuts to the top marginal rate are supply-side friendly, but if one was solely focused on boosting demand, temporary personal income tax reductions for low-income workers would better serve the objective. The new tax credit to single workers earning up to 80% of the median wage falls into this category, and re-establishes fairness vis-a-vis families, though it is permanent and could adversely affect beneficiaries' future labour supply because it increases marginal effective tax rates (METRs), as does Working for Families.
But this stimulus also inflates a deficit that is already rising in response to the sharp cyclical slowdown, forcing the authorities to increase local-currency bond issuance. Around two-thirds of the public debt stock (worth some USD 18 billion) is held by foreign residents, albeit denominated in domestic currency (Figure 1.12). The very nature of this crisis, though, makes such credit hard to get, since risks are being reassessed and risk appetites will probably undershoot before stabilising. By the end of the budget's medium term horizon in 2013, gross debt in the main forecast scenario will have doubled to 33% of GDP (39% in the downside scenario). Although still quite modest by OECD standards, the government considers this level of debt to be "imprudent" (English, 2008). Indeed, some rating agencies have stated that without a credible medium-term fiscal plan and some easing of external imbalances, New Zealand risks a downgrade (see above). Mounting debt and a deterioration in New Zealand's credit rating would result in higher debt-servicing costs, worsened debt dynamics and the need for a larger fiscal adjustment later on. A downgrade could also critically weaken the impact of the stimulus itself by undermining private-sector confidence, ability to plan and credit availability.
[FIGURE 1.12 OMITTED]
New Zealand's fiscal funding vulnerability, despite relatively low debt, stems from several factors, all of which are being exacerbated by the ongoing crisis:
* First, excessive total economy indebtedness abroad raises the sovereign risk premium which must be paid by government even if it itself may be in healthy shape. (10) Conversely, the quality of the bank wholesale guarantees depends crucially on the creditworthiness of government. Though households will be winding down their debt levels via both conventional Ricardian effects and the adjustment process outlined above, external indebtedness will likely keep rising for a while, especially as current-account deficits well above the debt-stabilising level of around 4% of GDP (see above) are expected by forecasters to persist for some years to come. If, in addition, global risk aversion were to rise further, then the NZ country-risk premium could rise.
* Second, taking into account total long-run unfunded fiscal liabilities, New Zealand already exhibited less of a fiscal advantage prior to the crisis than fiscal indicators suggested: the long-run increase in pension and health spending associated with population ageing is projected to exceed the respective OECD averages (Table 1.7), to which must be added the worsened medium-term fiscal starting point as well as a recently-identified additional funding requirement for the Accident Compensation Corporation (ACC). (11) Contingent liabilities from the new financial-sector guarantees have also worsened the long-run outlook, though no more so than in other OECD countries.
* Third, both evolving data and consensus forecasts suggest that the macroeconomic assumptions underlying the main budget forecast are optimistic. In the latest budget update, the previous budget's downside economic scenario had become the new main scenario, and a repeat of this pattern now seems likely, (12) in which case the automatic stabilisers and potential need for further stimulus would imply a higher deficit and debt build-up than now projected.
The government's latest budget update has calculated that in the absence of policy changes, structural deficits of around 3% of GDP (4% in the downside scenario) would emerge toward the end of the budget horizon and deficits would persist over a prolonged period. This implies that by 2023, public debt would reach nearly 60% of GDP (80% in the downside scenario), compared with less than 20% in the pre-crisis (May 2008) baseline and some 30% in the pre-election (October 2008) baseline. A key factor driving this result is a permanently lower level of nominal GDP compared with forecasts made before the crisis--due to lower real GDP and inflation over at least the next few years--implying lower tax revenues. But even when real GDP has fully recovered (and reaches the point at which the output gap closes), the tax baseline stays on a permanently lower trajectory as a result of both recession-induced disinflation and wealth destruction. Since the Reserve Bank targets inflation and not the price level, the previous path for the GDP deflator is by assumption never regained; by contrast, primary non-cyclical expenditures are assumed to be pre-set over the budget horizon in nominal terms (apart from certain social benefits indexed to prices), and it is from this unchanged base that the 10-year spending projections grow, de facto adversely affecting the balance. More serious, however, are real tax losses induced by terms-of-trade and asset-price declines, and possibly long-lasting reductions in potential output. Expenditure further contributes to the projected deterioration through increased finance costs deriving from higher debt levels. Lower nominal GDP growth also increases the debt-to-GDP ratio for any given level of debt.
Medium-term fiscal strategy to maintain credibility
Fiscal policy needs to perform a delicate balancing act. It must avoid turning overly restrictive so long as the output gap remains deep in negative territory; to do otherwise could be self-defeating. On the other hand, it must avoid deficits becoming so entrenched that markets lose faith and either or both the government and the banks find it materially more difficult, or more costly, to issue debt. It is important that a credible multi-year fiscal consolidation programme be presented with the May 2009 budget in order to secure continuing satisfactory access to credit in a highly risk-averse market. In turbulent times, markets may look askance at smaller countries in any event, preferring US Treasuries and other large countries' debt as more secure and liquid investment vehicles. The government promised to take steps to prevent realisation of the projected debt path shown in its December 2008 budget update, with a focus on reducing over-staffing and re-examining the entirety of public spending for its effectiveness and necessity. As an initial move, the Minister has pledged to: identify true fiscal risks; drop unfunded commitments of the previous government; limit the 2009 budget process to the immediate priorities of the new government; and cap the number of people employed in back office administration (English, 2008). Details of the future path to consolidation are not expected before the budget.
Fiscal policy should do all it can to set the appropriate context for a resumption of growth and current-account adjustment, New Zealand's real Achilles heel. It may be questioned whether fiscal settings--i.e. not only the level of debt, but also the level and nature of spending and taxes--has up until now always been ideal from a growth perspective. According to at least one estimate, the size of government is negatively associated with economic growth in New Zealand (Grimes, 2003). Hence, the best use of surpluses, or equivalently budget room made possible by spending cuts, may be to cut taxes, which exert a significant drag (deadweight loss) on growth, in particular corporate and personal income taxes (Price et al., 2008). An analysis of effective tax rates for New Zealand suggests that the disincentive effects facing households in making their labour-supply decisions are relatively high, in particular due to abatement of the Working for Families package over a wide income range. A flatter tax rate structure accompanied by more targeted welfare measures could improve work incentives (Creedy et al., 2008). (13) The 2001 hike in the top marginal personal income tax rate may have been especially distortive to saving-investment decisions. In combination with the lack of capital gains taxation, it may have contributed to the size of the housing bubble and the eventual economic downturn by raising the relative post-tax return to housing investments.
Careful analysis is therefore needed in order to establish that the marginal benefit of new spending justifies the extra deadweight cost of the resulting taxation. Well designed infrastructure spending is likely to yield high returns, the more so as it was cut sharply during the initial consolidation and never fully restored. (14) Social spending is less certain: if it enhances market security and builds human capital, it too will enhance growth potential, but if it reduces the need to save or the incentive to work, then it would go the other way. The policy orientation signalled by the new government, namely reducing government to a more efficient size, appears well adapted to an era of tighter budget constraints and lower potential growth. Focusing new spending on infrastructure and tax cuts on reductions in the top personal income tax rate could be productivity-enhancing.
The global crisis has imparted a substantial shock to the NZ Super Fund. By 31 January 2009 crisis-induced losses had wiped out some one-quarter of the fund's value, reducing average annual returns since the fund's inception in 2003 to 3.3%, or 3.6% less than the risk-free rate. Given the sustained period of deficits ahead and ongoing contributions to the Super Fund (which would need to be boosted in line with lower expected returns), (15) the government will effectively be borrowing to invest in financial assets. In such a context, it should undertake a more fundamental examination of its prefunding strategy. It has a couple of options. First, pension reform could partially reduce the expenditure burden associated with an ageing population by reducing the size and need for Super Fund contributions. Second, the government could suspend contributions as long as deficits persist, or at least until global credit conditions improve. Prior to the elections, the incoming government had proposed that a part (perhaps 40%) of NZ Super be set aside to help fund infrastructure investments. While such reactions are understandable, the governance arrangements that protect the statutory independence of the fund's governing board should be safeguarded. The Fund is subject to commercial objectives aimed at maximising returns. Introducing non-commercial objectives will only weaken the effectiveness of this strategy by lowering returns. The government should instead focus on stemming the losses from public shareholdings in ACC, Air New Zealand and KiwiRail (Chapter 2), and scrutinising to what extent apparently profitable entities like KiwiBank may owe their success to implicit public guarantees, or may distort sector competition.
The budget framework
The budget framework is rather sophisticated, modern and successful in many respects, notably regarding debt control. Such control is optimised within the context of a forward-looking budget process, wherein the government "ties its hands" by fixing operating and capital "allowances", i.e. annual nominal new spending commitments, several years in advance normally covering the full parliamentary term. The framework may have been less successful in holding spending growth in check in the face of buoyant revenues, rather than allowing pro-cyclical growth of public spending, however. (16) For example, there was little to stop recurrent positive revenue surprises in recent years, notably arising from terms-of-trade gains, from being spent by the end of each budget year, as the focus was on the target for the operating balance (and equivalently, debt), while the operating allowance applies to net spending, defined as spending less revenues and cyclical effects. (17) For a commodity exporter like New Zealand, the method of structurally adjusting the fiscal accounts might be considerably improved by making an adjustment for the commodity price cycle, over and above that for the domestic cycle as conventionally made (see Table 1.4 and Turner, 2006). Using this type of adjustment for purposes of applying the budget rule would be akin to saving and withdrawing fluctuating commodity revenues in an asset stabilisation fund of some sort. In addition to the challenges of determining trends in the terms of trade and their effects on revenues, issues around institutional design, such as who makes the adjustment and how stabilisation funds are managed, are relevant as well.
Moreover, while the practice of fixing the operating allowance (and spending baselines) in nominal terms is a useful tool for exerting spending discipline during inflationary times, in present recessionary circumstances it appears to impart an upward deficit and debt bias to the projections. Unanticipated disinflation since the NZD 1.75 billion operating allowance for budgets 2009-12 was initially set (in May 2008) has raised its real value, as indeed that of the entire spending baseline (some NZD 32 billion in 2008). It also may be queried why the allowance was not adjusted downwards when the new inflation forecast was made: upward adjustments during the evolving budget year have occurred in the past. (18) By the end of the medium-term horizon in 2013, and beyond, the level of real spending will be around 1% higher than originally intended, that being the extent of the downward shift in the GDP deflator. This may be considered a sort of automatic stabiliser, but one which will never be offset in the upturn, since as noted the price level will not revert to the earlier assumed path. Hence, the spending ratio remains permanently higher than it would have otherwise been.
There may be an argument for adopting a spending rule to supplement the fiscal transparency principles and current medium-term fiscal objectives which provide the main fiscal anchor. A number of OECD countries have instituted expenditure rules, with good results (Box 1.1), and New Zealand employed a form of expenditure rule in the 1990s and early 2000s. A party in the new governing coalition is pushing for a rule that caps nominal spending growth to population growth plus inflation, i.e. a real per capita spending cap, which might perhaps be made more flexible depending on consolidation needs and the particular design of the rule that may work best for New Zealand, for example excluding cyclically-sensitive items such as unemployment benefits from the cap. In severe downturns as at present, moreover, the rule would have to be temporarily suspended to allow for the needed discretionary action. A major advantage of a spending rule is that it separates spending levels from unforeseen revenue volatility while allowing full use of the automatic stabilisers, making resources more predictable and budgets more symmetric over the cycle. Critically evaluating all baseline spending, as the government intends, would be a good prelude to a spending rule. Such a review would be considerably strengthened if undertaken by an independent agency on an ongoing basis, as would be consistent with past OECD advice (Rae, 2002).
Box 1.1. Fiscal spending rules--a good idea? New Zealand, like Australia and the United Kingdom, follows a principles-based approach to budget management allowing for greater flexibility than rules. The NZ budget is anchored by the twin principles of transparency and fiscal responsibility enshrined in law. The first principle requires full and accurate communication of the budget's long-term situation as a means of disciplining policy-makers via market reactions; the second stipulates that a "prudent" level of the debt shall be achieved and subsequently maintained. In practice, governments bind themselves to a long-term debt target by means of budget balance defined to apply on average and to the current operating balance, allowing deficits when growth is below trend, and conversely for surpluses; borrowing is permitted to fund capital spending. This approach has been generally successful in both smoothing the economic cycle and maintaining fiscal sustainability (Barker et al., 2008). Nevertheless, the transparency-responsibility approach seems to work well only after substantial budget consolidation has been achieved by other means (OECD, 2002). Hence, principles alone may not suffice in getting the fiscal situation back to equilibrium following the crisis, and may need to be supplemented by rules. Budget-balance rules are most commonly used in the OECD, but have generally not met with great success. Some countries have replaced or supplemented budget-balance rules with spending rules, with good results: * The US spending cap rule was particularly successful in eliminating federal deficits from 1991 through 2002, even though it was later suspended. It subjected annual appropriations (discretionary spending) to a nominal spending cap, imposing pay-as-you-go restrictions (deficit neutrality) on all mandated spending (entitlements) net of total taxes. The rule was adjusted ex post by budget sequesters (across-the-board spending cuts). * Finland supplements EMU rules with a rolling four-year real ceiling on central government spending, except for the 25% of spending that is cyclical and EU financed. It allows the government to take action as a brake on excessive deficits, i.e. higher than 23A per cent of GDP. Finland has never faced an excessive deficit procedure. * The Netherlands replaced its deficit rule by an expenditure rule in 1993, which enabled a successful fiscal turnaround. Real spending caps were established over the term of the government, with strong firewalls between revenue and expenditures: if the budgetary situation turns out more favourable than expected, then some of the extra revenue is used to cut taxes, depending on the size of the remaining deficit. * Following the early 1990s financial crisis, in 1997 Sweden adopted a nominal ceiling on central government primary expenditure, including old-age pensions, on a rolling three-year basis, though with a margin of flexibility. The ceilings have been an effective means of achieving a 1% surplus target and even exceeding it. In good times early in the current decade the margin for flexibility was used up, which was problematic. However, in the last boom these margins were kept sizeable and they are giving room for automatic stabilisers to work freely in the current recession. Tax expenditures have to some extent been used as a back door method of circumventing the rule. However, the government has in recent years largely avoided this practice and tightened the principles for its use. According to Anderson and Minarek (2006), spending rules appear to outperform deficit rules in virtually every aspect of budget policy: i) a spending rule provides firm guidance to policy makers whether the economy and budget are weak or strong, whereas deficit rules may encourage countries to run the maximum deficit permitted, running the risk of creating excessive deficits under adverse conditions (fiscal responsibility); ii) spending rules allow the automatic stabilisers to work fully and symmetrically over the cycle, whereas deficit-based rules provide no incentive for counter-cyclical policy during upswings and can limit even the operation of automatic stabilisers in the downswing (macroeconomic stabilisation); iii) violations of a spending rule are transparent and easy to enforce, unlike deficit based rules, which are easier to evade by making optimistic economic assumptions or unlikely plans for future spending and tax discipline and then pleading exemptions ex post by blaming the failure of assumptions to materialise (credibility); iv) a spending rule makes the availability of resources, notably those annually appropriated for the core functions of government, more predictable, whereas under a deficit rule, resource availability may flip flop along with cyclical and budgetary developments; v) funding for public investment can be more easily protected under a spending rule, either by requiring additional fiscal restraint through mandatory spending or taxes, or by setting a separate appropriations limit for investment, but with a deficit rule, a separate golden rule is usually required; vi) the greater fiscal predictability encouraged by spending rules can ease co-ordination with monetary policy, while also providing for greater confidence and behavioural stability in the private sector.
Local government spending has contributed to the spending push, following earlier reforms which greatly expanded the scope of local authority powers, presumably in line with the principle of subsidiarity. Local governments have progressively moved beyond basic local services such as water, rubbish and sewerage into various cultural, social and economic activities. Part of the problem stems from weak democratic accountability at the local level, characterised by low turnout in local elections, undue influence by special interests and opaque funding. Profligate spending has been funded by steadily increasing "rates", a general tax on property values--which has contributed to domestic inflation--while user charges play less of a role than formerly. Differential rating has furthermore imposed disproportional costs on businesses, cross-subsidising households to the detriment of local private investment and development of the local tax base, even though these differentials have been shrinking. Local councils' commercial investments in sectors such as ports get poor returns and distort capital allocation (see Chapter 2).
A local-government spending cap like the one proposed above would help; indeed, it should be legally binding unless overwritten by specific voter approval (Kerr, 2007). But by itself it may be insufficient to achieve the retrenchments needed to reduce tax pressure. Greater accountability and transparency in financing could create better incentives to constrain spending. For example, road tolls should be used, and water should be metered, with a user charge set at marginal cost and not subsumed together with everything else in rates, so as to encourage conservative usage and capacity expansion.
Preparing for the demographic transition
Sharp declines in fertility since the end of the long post-war baby boom and a trend rise in longevity mean that OECD countries, and increasingly developing ones, will face a lasting step increase in the ratio of the elderly to the working-age population once the baby boomers retire. In New Zealand, the number of people over 65 is projected to grow almost three-fold and those over 85 six-fold by 2050, while the working-age population will shrink slightly, implying a sharp rise in the old-age dependency ratio starting around 2020. (19) The adverse impact of ageing on potential growth may be less of a concern in New Zealand than in other OECD countries because of its relatively high rate of net immigration, albeit one that is quite cyclically sensitive. But other demographic changes will have a more direct fiscal impact. An increase in Pacific Island and Maori populations, which tend to have a higher incidence of chronic health conditions, and in Asian immigrants, could further strain the social spending system. Technological advances allowing improvements in health care will probably exacerbate demand pressures much more than demographics. The political and economic scope for increasing the tax ratio, on a stagnant base, to pay for these rising health and pension needs is probably rather limited.
The most recent (2006) official long-run fiscal projections show that costs associated with ageing and especially health care will push the debt ratio from 20% in 2020, when ageing pressures will start to bite, to 100% by 2050 (see Chapter 3). The financial crisis has significantly worsened this picture. The combined effects of ageing and of the crisis could give rise to highly non-linear and patently unsustainable debt dynamics. This underlines the need to unwind the crisis' impacts as much as possible before the onset of population ageing.
Policy action to contain future pensions and health spending should likewise be undertaken fairly rapidly, to allow time for the required behavioural adaptations as well as to reduce the need for prefunding through the Super Fund. As in other OECD countries, controlling health care costs is the most pressing fiscal challenge and it is discussed in depth in Chapter 3 of this Survey. The basic universal public pension (currently around two thirds of the average wage for a couple and one third for an individual) minimises economic distortions insofar as it avoids disincentives to private saving associated with means-tested old-age assistance observed in other OECD countries. However, universal benefits are very expensive. To make significant long-run savings, the universal benefit should be indexed to the CPI rather than wages, a step that has already been taken by many OECD countries. Furthermore, the retirement age should be indexed to rising life expectancy, an "actuarial fairness" feature increasingly recognised as essential to sustainability and justice of public pension systems in other OECD countries. (20) Although the retirement age was raised from 60 to 65 in the 1980s reforms, a further rise to at least 67 (as in the United States) could soon be envisaged and thereafter be aligned with longevity gains.
The last government introduced an opt-in private pension savings scheme (KiwiSaver), including a government subsidy for employer contributions to workers' savings. The intention was not just to top up the basic public pension with a new private pension pillar in order to ensure the sustainability of the public pension system, but also to encourage saving so as to help reduce the current account deficit. Although the take-up of KiwiSaver was considerably higher than expected, saving in the aggregate fell for a variety of reasons already discussed. The new government has recently reduced the subsidy in order to help pay for its tax cuts. It might consider other ways to bolster saving incentives, notably by removing inter-temporal distortions in the tax system by greater reliance on consumption-based taxation, including property tax at the local level. The government also significantly influences private saving behaviour through public service provision and income transfers (Ramakrishnan, 2003). Enhancing private cost sharing for health-care services (Chapter 2) and further reforming public pensions as suggested could help to motivate higher saving.
Box 1.2. Recommendations for macroeconomic policies Monetary policy and financial regulation In the short term, monitor closely the impact of the evolution of the financial crisis on the domestic economy: * Give precedence to monetary policy over fiscal policy in responding to any further deterioration in economic conditions as long as the former remains effective and does not put orderly exchange-rate adjustment at risk. Do not use further fiscal stimulus other than as a last resort, in which case measures should be temporary to allow fiscal consolidation over the medium term. * Given normal lags in monetary policy transmission, normalise monetary policy settings relatively rapidly once recovery is securely underway. And in the longer term: * Anchor inflation expectations around the middle of the target inflation band (currently 1-3%). * Exit from the government wholesale bank-funding guarantee once financial market conditions normalise, and convert the retail-deposit guarantee into a self-financing, risk-based insurance scheme. Fiscal policy Present a credible 2009 budget, aimed at attaining structural balance as soon as possible, to avoid a ratings downgrade: * Undertake a comprehensive spending review tasked with identifying sufficient savings to noticeably reduce the deficit. * Develop a spending rule that supplements objectives for the fiscal balance and debt to underpin fiscal consolidation and economic growth. The target should preferably be expressed as a real level and cover all primary current spending (including entitlements) other than spending associated with the operation of cyclical stabilisers. The underlying revenue baseline should include an adjustment for the commodity price cycle. * Subject accelerated infrastructure spending to rigorous cost/benefit analysis and transparent procurement and costing procedures. * Formulate a strategy to deal with loss-making public enterprises, such as rail and the ACC; monitor profitable ones like Kiwibank and their effects on sector competition (see Chapter 2). * Ensure that pre-funding pensions does not lead to an imprudent build-up in debt given projected deficits. * Keep the New Zealand Superannuation Fund free from political interference by maintaining the governance arrangements that provide managerial and board statutory independence. Improve the long-run budget balance: * Implement parametric pension reform, notably by indexing benefits to the CPI and by raising the retirement age in line with longevity, preferably via annual formula-based small steps. * Undertake further health reforms to get greater value for money in public spending and more burden-sharing by the private sector (see Chapter 3). Arrest the upward spending bias in local government: * For funding transparency and accountability, introduce marginal-cost-based user charges on water, sanitation and roads; equalise local council rates for businesses and households; consider adopting a legislated real per capita spending cap with the possibility to override, e.g. to finance special projects, only by special voter referendum.
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Statistics New Zealand (2008), Demographic Trends 2007, Wellington.
Turner, D. (2006), "Should measures of the fiscal stance be adjusted for terms of trade effects?", OECD Economics Department Working Papers, No. 519, OECD, Paris.
Westpac Institutional Bank (2008), "Housing equity withdrawal and its impact", 16 May.
(1.) International dairy prices have fallen sharply, with whole milk powder prices down by 55% since July 2008. Fonterra, the large dairy co-operative that is the world's leading exporter of dairy produce and New Zealand's largest company and exporter by far, in late January 2009 announced a forecast payout to farmers for the 2008/09 season at NZD 5.10 per kilogramme of milk solids, the third downgrade in four months. Though still the third highest price on record, it is down markedly from NZD 7.90/kg last year, and implies a 25% cut in expected farmer revenue. Meanwhile, an excess of stocks is putting pressure on storage capacity. An oversupply in response to previous sky-high prices reflects the typical hog-cycle problem. The EU's recent decision to reintroduce export subsidies on dairy produce exacerbates the global excess supply and has been strongly criticised by the NZ government, which is hoping to convince the EU to set time limits on its measure and also to avoid similar measures being taken elsewhere.
(2.) Housing equity withdrawal (HEW) occurs when the change in borrowing exceeds residential investment. Over the five years to mid-2007, HEW amounted to an estimated NZD 5.7 billion. Since then, a sharp fall in the value of house sales implies negative HEW (equity injection). An estimated 25-30% of HEW goes to finance consumption spending; this "wealth effect" acts as a major channel of monetary policy transmission. See Westpac (2008).
(3.) For more information on the impacts of the financial crisis in New Zealand and on policy steps taken and planned as of November 2008, see Reserve Bank of New Zealand (2008a).
(4.) Fees are 10 basis points of the liabilities covered in excess of NZD 5 billion per institution.
(5.) Surging fiscal revenues between around 2003 and 2007 was an OECD-wide phenomenon. Joumard and Andre (2008) trace these to: exhaustion of corporate loss carry-forward provisions, housing bubbles boosting transactions taxes, surging financial-sector profits due to low interest rates and financial innovations, strong capital gains for stockholders and personal income tax bracket creep. These windfalls--only a minor part of which could be ascribed to the cyclical influence but in the end proved temporary--prompted policy measures that permanently weakened budget positions.
(6.) Part of the increase was "technical", as the reduction in KiwiSaver subsidies (used to pay for tax cuts) does not affect the government's measure of the fiscal stance.
(7.) The government was content that it had acted as a prudent fiscal guardian. At the time of the first long-term projection exercise, the Minister of Finance stated that the government was coping well with an ageing population and managing public finances within the 2004 Public Finance Act's principles of responsible fiscal management, and that the Opposition's plan for multi-billion tax cuts would have been irresponsible (Cullen, 2006).
(8.) Estimations for New Zealand suggest an elasticity of private debt with respect to government debt of around -0.5. Empirical studies have shown that roughly 50% of increased public savings tends to be offset by a reduction in private savings (and conversely). See Salgado (2004).
(9.) See, for example, H. Ergas, "Miracle cure that wastes tax dollars", The Australian, 8 October 2008.
(10.) Rating agencies' valuations of the sovereign risk premium are proprietary and therefore cannot be reported. However, information can be gleaned from credit default swap rates on NZ government bonds, which shot up in early 2009 from about 0.2% to 1.4% (source: Datastream, code: NZGVTS5). One caveat, however, is that instability of the data over certain periods shows this market to be possibly quite thin.
(11.) The Government funds the cost of injury claims that non-earners submit to ACC (Vote ACC). Other injury claims are funded through levies on petrol, earners and employers. In December 2008 the government approved NZD 297 million per annum of additional funding for non-earners. This item was not disclosed in the pre-election update when in hindsight it should have been. Following an inquiry into that non-disclosure, the criteria for disclosure have been clarified and strengthened. Since December, ACC has faced falling interest rates (which increase its liability valuation) and continuing cost and volume pressures. As a result PricewaterhouseCoopers has increased its estimate of the ACC liability at 30 June 2009 by NZD 2.581 billion, from NZD 19.925 billion to NZD 21.875 billion. Unless these recent interest rate and cost trends reverse, ACC will be obliged later in the 2009 calendar year to seek a further increase in the Government's funding of its non-earners' account. In the meantime, updates to liability valuations and asset values are reported in each month's reported Financial Statements of the Government.
(12.) Just two weeks into the new year, PM John Key stated that the international economy had deteriorated since December and New Zealand was closer to Treasury's "downside scenario" than it was at the end of the year (see "Economy on 'downside' of forecasts", www.stuff.co.nz, Thursday, 15 January 2009).
(13.) Though the top statutory rate of 39% affects only 13% of taxpayers, some 40% of primary earners and over 20% of secondary earners face marginal effective tax rates of 39% or more because of abatement of Working for Families transfers, mostly at lower middle income levels (Creedy et al., 2008).
(14.) The government investment-to-GDP ratio fell from 8% on average during 1962-86 to 4.2% over the period 1987-2010 (the latter part of which is projected).
(15.) The New Zealand Pension Authority has estimated that the Finance Minister would need to increase the 2009/10 contribution from the NZD 1.97 billion calculated last year to at least NZD 2.3 billion in order to keep pace with the legally prescribed formula (see "Super Fund needs $400 m to keep up", www.stuff.co.nz, 23 March 2009).
(16.) IMF (2007) shows that an increase in real government spending during episodes of capital inflow into the advanced countries was associated with a larger increase in domestic demand and inflationary pressures, and subsequently harder falls in demand and GDP after capital inflows slow; conversely, fiscal discipline during the boom allows for a softer landing.
(17.) In this sense, higher revenues than expected on the basis of policies and the domestic economic cycle would boost the amount of gross spending consistent with the operating allowance. By the same token, higher revenues resulting from above-potential GDP growth would not affect the allowance, permitting automatic stabilisers to work fully, although because of reporting lags, the discrepancy between actual and expected cyclical effects is not immediately known.
(18.) According to Barker et al. (2008), allowances for the next budget have been revised frequently and by significant amounts in response to upward revisions of tax revenue forecasts and lower-than-budgeted expenditure.
(19.) The NZ working-age population is projected to peak at 2.39 million in the mid-2020s, before declining slightly to 2.38 million by 2051 (Statistics New Zealand, Demographic Trends 2007).
(20.) Pension prefunding allows tax smoothing, but could also be seen as a generationally fair, once-for-all adjustment appropriate to address the one-time shift in the dependency ratio arising from the present decline in fertility (in other words, the current generation should have to save more in order to compensate for its failure to have more children). Further dependency increases due to rising longevity with a fixed retirement age clearly benefit future generations; hence prepaying for that part of the fiscal sustainability gap would be unjust and should instead be covered by indexing retirement age to longevity. This strategy also makes the system more robust to the high uncertainty in demographic projections. See Andersen (2008).
Table 1.1. Demand, output and prices 2005 2006 2007 2008 Current prices percentage changes, NZD billion volume (1995/96 prices) Private consumption 92.0 2.6 4.0 0.1 Government consumption 28.0 4.6 3.9 4.0 Gross fixed capital formation 37.4 -0.4 5.0 -5.7 Final domestic demand 157.4 2.2 4.2 -0.5 Stockbuilding (1) 1.3 -0.8 0.3 0.2 Total domestic demand 158.7 1.4 4.5 -0.3 Exports of goods and services 43.4 1.8 3.8 -1.8 Imports of goods and services 46.7 -2.6 8.6 2.5 Net exports (1) -3.2 1.3 -1.5 -1.2 GDP at market prices 155.4 2.6 3.0 -1.6 GDP deflator ... 2.2 4.2 4.7 Memorandum items: GDP (production) 2.0 3.1 0.2 Consumer price index 3.4 2.4 4.0 Private consumption deflator .. 2.8 1.6 3.4 Unemployment rate 3.8 3.6 4.1 General government ... 5.9 5.0 2.8 financial balance (2) Current account balance (2) ... -8.7 -8.2 -8.9 2009 2010 percentage changes, volume (1995/96 prices) Private consumption -0.6 0.0 Government consumption 4.5 4.5 Gross fixed capital formation -19.2 -1.4 Final domestic demand -3.7 0.7 Stockbuilding (1) -1.1 0.0 Total domestic demand -4.8 0.7 Exports of goods and services -11.9 0.2 Imports of goods and services -17.0 0.7 Net exports (1) 1.9 -0.2 GDP at market prices -2.9 0.5 GDP deflator 1.8 2.6 Memorandum items: GDP (production) -2.8 0.5 Consumer price index 2.1 1.7 Private consumption deflator 2.1 1.0 Unemployment rate 6.8 7.9 General government -2.1 -4.9 financial balance (2) Current account balance (2) -7.6 -6.3 (1.) Contributions to change in real GDP (percentage of real GDP in previous year). Stockbuilding is calculated as the difference between total domestic demand and final domestic demand. (2.) As a percentage of the spending measure of GDP. Table 1.2. Household wealth (1) NZD billion, end of year 1985 1990 1995 2000 2005 2006 2007 Housing assets 73 127 182 231 506 559 614 Financial assets 49 68 99 126 165 188 200 Total assets 122 195 281 357 671 747 814 Financial liabilities 14 28 47 74 135 152 170 Net wealth 108 167 233 279 528 586 634 Memorandum item: Housing assets as a 59.8 65.1 64.8 64.7 75.4 74.8 75.4 percentage of total assets (1.) The figures do not cover all assets and liabilities of the household sector. For example, they do not include holdings of equity in privately-owned businesses. Source: Reserve Bank of New Zealand. Table 1.3. Structure of banking system funding (1) August 2008 Share of total NZD billions funding (%) Retail funding 133 44 Resident wholesale funding 40 13 Non-resident wholesale funding 127 42 of which: Maturity less than one year 81 27 (estimated) (2) Maturity greater than one 46 15 year (estimated) (3) Total funding 299 100 (1.) Table excludes domestic inter-bank lending, capital and reserves and non-funding liabilities. (2.) Includes overseas commercial paper and other short-term international funding. (3.) Includes overseas bond issues and other short-term international funding. Source: : Reserve Bank of New Zealand (2008), Financial Stability Report, November 2008. Table 1.4. Fiscal indicators As per cent of potential GDP, national accounts basis Fiscal variables Cyclically Cyclically Net interest Unadjusted adjusted adjusted payments balance primary taxes (1) (% of GDP) (% of GDP) spending (1) 1990 41.3 47.5 4.1 -4.5 1991 40.5 45.4 2.8 -3.4 1992 40.0 45.0 2.9 -3.0 1993 38.5 44.5 2.3 -0.3 1994 37.4 45.7 1.2 2.9 1995 37.2 44.7 1.4 2.8 1996 36.7 43.7 0.7 2.8 1997 37.4 42.9 0.9 1.4 1998 36.4 41.4 0.7 0.4 1999 36.9 40.8 0.2 0.0 2000 35.6 40.8 0.4 1.9 2001 34.8 40.1 0 1.8 2002 34.4 41.2 0 3.8 2003 34.9 42.1 -0.1 4.0 2004 34.8 41.8 -0.4 4.1 2005 35.8 43.8 -0.6 5.2 2006 36.6 45.5 -1.7 5.9 2007 37.1 44.8 -1.0 5.0 2008 (4) 37.1 43.2 -1.2 2.7 2009 (4) 37.3 41.0 -0.9 -2.1 2010 (4) 37.5 39.3 -0.5 -4.9 Fiscal variables Estimated transitory changes in taxes/spending Cyclically Underlying adjusted primary Output gap Terms of trade balance (1) balance (2) component component (3) 1990 -4.0 -0.2 -0.5 0.3 1991 -1.6 1.4 -1.9 -0.2 1992 -0.7 2.3 -2.3 -0.3 1993 0.9 3.0 -1.2 0.1 1994 3.0 4.0 -0.1 0.2 1995 2.4 3.4 0.4 0.4 1996 2.2 2.4 0.6 0.5 1997 1.3 1.9 0.2 0.3 1998 1.2 1.7 -0.9 0.2 1999 0.4 0.5 -0.4 0.1 2000 2.0 2.4 0.0 0.0 2001 2.0 1.4 -0.2 0.6 2002 3.5 3.1 0.2 0.4 2003 3.6 2.7 0.4 0.9 2004 3.3 1.6 0.8 1.3 2005 4.4 2.4 0.8 1.3 2006 5.5 2.7 0.5 1.1 2007 4.3 1.6 0.7 1.7 2008 (4) 2.9 -0.3 -0.2 2.1 2009 (4) 0.5 -2.3 -2.6 2.0 2010 (4) -1.4 -4.2 -3.5 2.4 (1.) Adjusted for output gap component. (2.) Balance excluding net interest payments, adjusted for both cyclical and terms-of-trade components. (3.) Based on methodology in Turner (2006) which applies tax elasticities to deviations of terms of trade from trend, the latter calculated as 1970-2007 average. (4.) Projections. Table 1.5. Evolution of the central government budget (June years; per cent of GDP) Operating balance excluding gains and losses (OBEGAL) BEFU (1) PREFU (2) HYEFU (3) 2007 3.7 3.7 3.7 2008 2.9 3.1 3.1 2009 0.7 0.0 -0.1 2010 0.5 -0.9 -2.3 2011 0.3 -1.2 -3.1 2012 0.1 -1.4 -3.1 2013 -- -1.5 -3.0 Change 2007-13 -3.7 -5.2 -6.7 (in percentage points) Cyclically adjusted OBEGAL BEFU (1) PREFU (2) HYEFU (3) 2007 3.7 3.5 3.5 2008 2.9 2.8 2.6 2009 1.1 0.6 0.3 2010 0.7 -0.3 -1.5 2011 0.2 -1.0 -2.7 2012 -0.1 -1.6 -3.1 2013 -- -1.7 -3.2 Change 2007-13 -3.7 -5.2 -6.7 (in percentage points) (1.) Budget 2008 Economic and Fiscal Update, 22 May 2008. (2.) Pre-election Economic and Fiscal Update, 6 October 2008. (3.) Half-Year Economic and Fiscal Update, 18 December 2008. Source: Treasury. Table 1.6. NZ fiscal stimulus measures Annual fiscal costs 2009 2010 Announced date NZD millions, 2008/09 June years Spending measures Accel. public investments Dec. 18 and Feb. 12 108 775 Reduced KiwiSaver subsidies (1) Dec. 18 -92 -664 Unemployment benefits Dec. 18 25 25 Tax measures Personal income tax cuts Low income groups May 22 1633 2440 High income groups Dec. 18 211 818 New independent earner tax credit Dec. 18 44 239 Small business tax relief Feb. 02 60 422 Eliminated R&D tax credit (1) Dec. 18 -36 -162 Total 1 953 3 893 Memorandum item: Fiscal impacts (as a percentage of GDP) Fiscal package impact (2) -1.2 -1.6 Total fiscal impulse (3) -3.5 -1.6 Residual (4) -2.3 0 2010 2011 2012 2013 NZD millions, June years Spending measures Accel. public investments 775 337 233 0 Reduced KiwiSaver subsidies (1) -664 -792 -870 -903 Unemployment benefits 25 0 0 0 Tax measures Personal income tax cuts Low income groups 2440 3351 4152 0 High income groups 818 702 616 0 New independent earner tax credit 239 356 364 0 Small business tax relief 422 -214 0 0 Eliminated R&D tax credit (1) -162 -193 -221 -249 Total 3 893 3 547 4 274 -1 152 Memorandum item: Fiscal impacts (as a percentage of GDP) Fiscal package impact (2) -1.6 0.2 -0.3 2.9 Total fiscal impulse (3) -1.6 -1.3 0 0 Residual (4) 0 -1.5 0.3 -2.9 (1.) Financing measure. (2.) Excluding financing measures, i.e. KiwiSaver subsidies, which are assumed not to affect demand, and R&D subsidies that were never actually implemented (only budgeted). (3.) As calculated by the NZ government (see Figure 1.11). (4.) Reflects ongoing impacts of past spending and tax measures and non-policy related structural shifts in expenditures and receipts. Source: Treasury. Table 1.7. Long-term projections for public spending in key areas Changes expressed in per cent of GDP (2005-50) Health and long-term care Total increase (1) Old-age Pure pension demographic Cost- Cost- effect pressure containment scenario scenario Korea 8.0 5.4 8.6 5.8 Greece 10.3 1.4 6.6 3.9 Portugal 9.3 2.1 6.2 3.5 Czech Republic 6.8 2.5 5.8 3.3 Luxembourg 7.4 1.5 6.9 3.8 Norway 8.0 0.9 5.1 2.5 Spain 7.0 1.8 6.5 4.0 Ireland 6.5 1.8 7.8 4.6 New Zealand 5.7 2.5 6.2 3.6 Belgium 5.1 1.0 5.2 2.6 Average 4.2 1.9 6.1 3.4 Finland 3.3 1.8 6.0 3.1 Netherlands 3.8 1.3 5.7 3.1 Switzerland 3.6 0.8 4.9 2.3 Denmark 3.2 1.0 5.0 2.4 Australia 1.7 2.3 6.1 3.4 Austria 2.2 1.8 5.8 3.1 Slovak Republic -- 3.7 6.9 4.0 France 2.1 1.5 5.3 2.7 Canada 1.7 1.9 6.2 3.5 Germany 2.0 1.3 5.5 3.0 Japan 0.6 2.6 6.5 4.0 Mexico -- 3.2 8.6 5.6 United Kingdom 1.7 1.3 5.5 2.8 United States 1.8 1.1 5.2 2.5 Hungary 1.2 1.7 5.6 2.5 Turkey -- 2.6 5.7 2.9 Italy -0.4 t.8 6.6 4.1 Iceland -- 1.4 5.6 2.7 Sweden 0.8 0.3 4.3 1.5 Poland -2.5 3.0 7.3 3.6 Total age related Korea 13.4 Greece 11.7 Portugal 11.4 Czech Republic 9.3 Luxembourg 8.9 Norway 8.9 Spain 8.8 Ireland 8.3 New Zealand 8.2 Belgium 6.1 Average 6.1 Finland 5.1 Netherlands 5.1 Switzerland 4.4 Denmark 4.2 Australia 4.0 Austria 4.0 Slovak Republic 3.7 France 3.6 Canada 3.6 Germany 3.3 Japan 3.2 Mexico 3.2 United Kingdom 3.0 United States 2.9 Hungary 2.9 Turkey 2.6 Italy 2.2 Iceland 1.4 Sweden 1.1 Poland 0.5 (1.) The "cost-pressure" scenario assumes that, for given demography, expenditures grow 1% per annum faster than income. This corresponds to observed trends over the past two decades. The "cost-containment" scenario assumes that some (unspecified) polity action is taken to curb this "extra" expenditure growth such that it is eliminated by the end of the projection period (2050). Source: Price, R., I. Joumard, C. Andre and M. Minegishi (2008), "Strategies for countries with favourable fiscal positions", OECD Economics Department Working Papers, No. 655, OECD, Paris. Figure 1.7. Net international liabilities December 2008 A. Asset type 71.8%, Bank Borrowing 5.0%, Government borrowing 16.3%, Other 6.8%, Equity B. Maturity 67.4%, > 3 months 6.4%, At call 26.2%, 2 to 90 days C. Currency 56.6%, NZD 28.7%, USD 8.9%, Other 5.7%, AUD StatLink http://dx.doi.org/10.1787/562454166386 Source: Statistics New Zealand, 2008 Balance of Payments and International Investment Position, December. Note: Table made from pie chart.
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|Title Annotation:||Chapter 1|
|Publication:||OECD Economic Surveys - New Zealand|
|Date:||Apr 1, 2009|
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