B.6 Half Year Economic and Fiscal Update 16 December 2020 Embargo: Contents not for communication in any form before 1:00pm on Wednesday 16 December 2020 B.6 Half Year Economic and Fiscal Update 16 December 2020 ISBN: 978-1-99-004500-4 (Online) An introduction to the Half Year Economic and Fiscal Update The Treasury is New Zealand’s economics and finance ministry. We advise on the direction of New Zealand’s economic policy with the aim of achieving a strong and sustainable economy, and raising New Zealand living standards. This includes reporting on the expenditure of government (fiscal) revenue, and assisting to ensure spending is fit for purpose and can improve outcomes for New Zealanders. Sharing what we do As the government’s lead economic and financial adviser, we forecast the economic outlook for New Zealand and the Government’s fiscal outlook. This Half Year Economic and Fiscal Update (Update) is part of a suite of documents we release as required by the Public Finance Act 1989. This Update primarily outlines what the Treasury observes in our current economic and fiscal climate, what we might see in the future, and what risks we may face over the next four years (our forecast period). This gives an indication of what the economy is most likely to do to inform decision-making. Making it New Zealander-centric Our advice is not just based on facts and figures. Improving outcomes means we need to understand which outcomes to improve and what is important to New Zealanders. We use the Treasury’s Living Standards Framework to recognise the different aspects of New Zealanders’ living standards and wellbeing. Our framework builds on 30 years of New Zealand and international evidence on wellbeing and provides a high-level framework on intergenerational wellbeing. Understanding our path The Treasury is in a unique position to focus on improving the way our economy can raise New Zealand living standards. Along with delivering first-rate economic and financial advice, we are committed to providing it in a way so New Zealanders understand how we work to achieve our goals. If you would like to know more about who we are and what we do, please go to our website at https://treasury.govt.nz © Crown Copyright This work is licensed under the Creative Commons Attribution 4.0 International licence. In essence, you are free to copy, distribute and adapt the work, as long as you attribute the work to the Crown and abide by the other licence terms. To view a copy of this licence, visit https://creativecommons.org/licenses/by/4.0/. Please note that no departmental or governmental emblem, logo or Coat of Arms may be used in any way which infringes any provision of the Flags, Emblems, and Names Protection Act 1981. Attribution to the Crown should be in written form and not by reproduction of any such emblem, logo or Coat of Arms. Internet The URL for this document on the Treasury’s website at December 2020 is https://treasury.govt.nz/publications/efu/half-year-economic-and-fiscal-update-2020 Contents Statement of Responsibility ................................................................................ 1 Executive Summary ............................................................................................. 3 The impacts of the response to COVID-19 on the economic and fiscal outlook ....... 5 Economic Outlook ................................................................................................ 9 Overview ................................................................................................................. 9 Economic Outlook ...................................................................................................13 Fiscal Outlook ..................................................................................................... 31 Overview ................................................................................................................31 Key Trends in the Fiscal Outlook ............................................................................35 Comparison to the Pre-election Update ..................................................................42 Operating Balance before Gains and Losses ..........................................................43 Residual Cash and Net Core Crown Debt ...............................................................46 Total Crown Balance Sheet ....................................................................................47 Key Economic Assumptions Used in the Forecast Financial Statements ................48 Risks to the Fiscal Forecasts ............................................................................ 49 Overview ................................................................................................................49 COVID-19 ...............................................................................................................50 Fiscal Sensitivities .................................................................................................51 Balance Sheet Risks ...............................................................................................52 Specific Fiscal Risks ...............................................................................................54 Statement of Specific Fiscal Risks ..........................................................................57 New Risks by Portfolio ............................................................................................62 Changed Risks by Portfolio .....................................................................................65 Updated Risks by Portfolio ......................................................................................67 Risks Removed Since the Pre-election Update .......................................................76 Contingent Liabilities and Contingent Assets ..........................................................77 Forecast Financial Statements .......................................................................... 81 Statement of Accounting Policies ............................................................................82 Government Reporting Entity ..................................................................................83 Forecast Financial Statements ................................................................................87 Notes to the Forecast Financial Statements ............................................................93 Forecast Statement of Segments ..........................................................................104 Fiscal Indicator Analysis .......................................................................................110 Core Crown Expense Tables ........................................................................... 117 Glossary of Terms ............................................................................................ 122 Time Series of Fiscal and Economic Indicators ............................................ 129 B.6 | i Statement of Responsibility I make this statement in accordance with section 26W of the Public Finance Act 1989. On the basis of the economic and fiscal information available to it, the Treasury has used its best professional judgement in preparing, and supplying the Minister of Finance with, this Economic and Fiscal Update. The Update incorporates the fiscal and economic implications both of government decisions and of other circumstances as at 30 November 2020 that were communicated to me by the Minister of Finance in accordance with the requirements of the Public Finance Act 1989 and of other economic and fiscal information available to the Treasury as at 30 November 2020. This Update does not incorporate any decisions, circumstances or statements that the Minister of Finance has determined, in accordance with section 26V of the Public Finance Act 1989, should not be incorporated in this Update. Caralee McLiesh Secretary to the Treasury 9 December 2020 To enable the Treasury to prepare this Economic and Fiscal Update I have ensured all government decisions and other circumstances as at 30 November 2020 of which I was aware and that had material economic or fiscal implications have been communicated to the Secretary to the Treasury, in accordance with the requirements of the Public Finance Act 1989. In accordance with section 26W of the Public Finance Act 1989, I accept responsibility for the integrity of the disclosures contained in the Update, responsibility for the consistency and completeness of the Update information with the requirements of Part 2 (Fiscal responsibility and wellbeing) of the Public Finance Act 1989 and responsibility for the omission from the Update under section 26V of the Public Finance Act 1989 of any decisions, circumstances or statements not incorporated in it. Hon Grant Robertson Minister of Finance 9 December 2020 B.6 | 1 Executive Summary 2020 2021 2022 2023 2024 2025 June years Actual Forecast Forecast Forecast Forecast Forecast Real production GDP (annual -2.1 1.5 2.6 3.7 3.8 3.2 average % change) Unemployment rate (June quarter) 4.0 6.6 6.8 5.7 4.7 4.0 CPI inflation (annual % change) 1.5 1.4 1.2 1.4 1.8 2.1 Current account (annual, % of -1.9 -2.8 -3.8 -3.4 -3.2 -3.2 GDP) Fiscal measures ($billions) Core Crown tax revenue 85.1 88.3 89.1 96.9 102.5 108.8 Core Crown expenses 108.8 114.2 109.1 112.0 115.3 118.7 Total Crown operating balance -23.1 -21.6 -16.4 -10.3 -7.5 -4.2 before gains and losses Core Crown residual cash -23.7 -40.2 -36.3 -23.7 -5.5 3.9 Net core