| New Zealand is a small island country located off | | | | review the long-term debt level forecasts to |
| Australia. While it has a developed economy, it is | | | | include the effect of the 2008-2009 crisis on the |
| subject to volatile fluctuations in GDP growth, due | | | | national debt level, reduce the allowances from |
| in large part to its dependence on trade and | | | | the planned 2010 budget, and delay tax cuts and |
| exports for much of its GDP. Additionally, the | | | | investment fund payments until the economy |
| government takes an active role in the economy | | | | stabilizes. |
| with large social programs, | | | | Due to the nature of New Zealand's economy, |
| state-owned-enterprises, and involvement in | | | | the size of purchases by the government has a |
| healthcare. By evaluating different factors of the | | | | large impact on the overall GDP. New Zealand's |
| economy, we can surmise whether or not this is | | | | government spending is close to 35% of its GDP, |
| a good investment location for a new | | | | consistent with the Treasury's goal of increasing |
| manufacturing plant. We will look at fiscal and | | | | productivity and improving the lives of New |
| monetary policy, GDP figures and components of | | | | Zealanders. As the chart to the right shows, in a |
| GDP, trends in these components, New Zealand's | | | | period of recession, such as 1999-2000 or |
| trade and its trading partners, and the exchange | | | | 2008-2009, the government increased spending |
| rate between USD and NZD as key determinants | | | | as a percent of GDP to compensate for |
| in our investment decision. | | | | decreased consumer spending. This suggests that |
| Fiscal and Monetary Policy | | | | New Zealand follows a Keynesian view that a |
| Like many economies in the developed world, | | | | recession should be countered by increased |
| New Zealand was hit by the recent financial crisis | | | | government spending as the recession is caused |
| and acted by altering its monetary and fiscal | | | | by decreased consumer demand. |
| policy. Due to the joint structure of the New | | | | Monetary policy and change during the 2008-2009 |
| Zealand Treasury and Reserve Bank, the | | | | financial crisis |
| Treasury maintains control over the fiscal policy | | | | As part of New Zealand's monetary policy, the |
| of the Crown, including management of SOEs | | | | Reserve Bank of New Zealand controls the |
| (state-owned enterprises) while the Reserve Bank | | | | banking system primarily through the Official Cash |
| controls the OCR (official cash rate) and reserve | | | | Rate (OCR), but also sets reserve requirements |
| requirements of banks - the monetary policy. | | | | for the banks. The chart to the right shows the |
| The Treasury's role in fiscal policy and its | | | | OCR since 1999. Of particular interest is the large |
| response to the financial crisis of 2008-2009 | | | | drop in the OCR during the 2008-2009 crises. The |
| According to the 2009 Fiscal Strategy Report, the | | | | OCR changed from 8.25% to 2.5% over nine |
| Treasury will focus on bringing down debt to a | | | | months. The Reserve Bank has expressed its |
| prudent level; ensure a stable economic | | | | policy to keep the OCR at a historic low rate until |
| environment, and a public sector that produces | | | | the middle of 2010 based on pressure from CPI |
| quality goods. In order to achieve these goals, the | | | | inflation, subdued credit growth, and weak |
| Treasury will look at long-term debt as net debt | | | | business spending. |
| to evaluate the strength of its financial position, | | | | |