English ushers in the 'new normal'

Thursday 18th November 2010

New Zealand's economic growth rate won't hit the 3.2% for the year to next March, predicted by the Treasury in the May Budget, but there will be a "rebound in the year to March 2012,” says Finance Minister Bill English.

That means the Treasury's December Economic and Fiscal Update, will show "a lower growth forecast for the year to March 2011" and "higher deficits in the short term."

The government's forecast cash deficit of $13.3 billion in the year to next March is already very high and must start falling quickly.

There will be "slightly flatter growth in the short term, but it will create a foundation for stronger growth in the longer term," said English, who also says New Zealand's underlying sustainable growth rate is lower, at "somewhere around" 2.5% annually.

"Slightly lower-than-forecast growth plus the effect of the Canterbury earthquake has flowed into slightly higher debt," English told a Cullen employment law firm breakfast function in Wellington.

English described the likely emergence of a "new normal" for economic conditions, based on continuation of the savings and investment ethic that the government hopes will emerge after belt-tightening to shore up balance sheets gives way to planning for the future.

In the short term, however, export growth is not offsetting falling tax revenue is already as people choose to save more.

English said the "new normal" would have some or all of the following characteristics:more disciplined household budgets.

"We will see more saving, less debt-fuelled consumption and a continued shift away from leveraged property investment; banks will be more cautious about lending as they rely more on deposits and on longer-term borrowing in volatile international markets;government won't grow so fast again. Tomorrow's government will be more flexible and interactive with business, more contracted out, more tech-savvy, more value conscious and generally more responsive;new jobs will come from the areas that have not grown much in recent years; the export sector and its downstream industries, including service exports which have declined notably in recent times.unemployment will continue to fall and skills will again be in demand."

"Trade patterns will continue to move quite rapidly in favour of emerging markets, where New Zealand has an ambitious and vigorous agenda in play."

English also foreshadowed the release of the first Investment Statement from the Crown, with the DEFU, a move intended to improve disciplines on government capital spending.

"The Crown is the largest single investor in a capital constrained economy. It is therefore vital that the Crown invests its capital efficiently." English also confirmed the government expects first fibre to be laid before Christmas under the $1.35 billion ultra-fast broadband roll-out plan.

"The Investment Statement will clearly set out the Crown's assets and liabilities, identify emerging issues and state how the Government plans to manage its large and growing investment in taxpayers' assets.

"We believe this level of transparent information – in a regular publication - will allow the public to demand a much greater level of accountability from the Government and lead to significantly better decision-making across the public sector," English said.

Businesswire.co.nz

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