Policies Adopted By The National Government Of New Zealand: An Overview

Overview of the New Zealand economy

Discuss About The Policies National Government Has Undertaken?

New Zealand The national economy of New Zealand ranks 53^rd and 68^th global positions in terms of nominal GDP and Purchasing Power Parity. The country is highly globalised and linked with Australian economy showing a GDP growth rate of 3.5%. The greater contribution to the GDP (almost 63%) comes from service sector followed by large scale manufacturing sector (16.5%) and primary sector (6.5%) which dominates the agricultural export of the country (Afonso and Sousa  2012). The country resides at the top of the world in terms of providing basic needs and opportunity of human creating foundation for general wellbeing.

Recently the Great Financial Crisis of 2008 impacted and intensified the economy of New Zealand which is evident in its increased cost of credits and lower availability of them, falling price of houses and housing crisis most vivaciously (Clemens and Miran 2012). The government dealt with this recessionary impact on the economic activity by adopting policies and strategies to bring out the stability overall.

The report aims to discuss such policies of fiscal and monetary importance as have been adopted by the national government.  It intends to analyze the efficacy and impact of the policies on the overall economic indicators determining overview of economic performance and stability.

Any country broadly consists of two types of marketing, goods market and money k. The economic performance of the country depends on the simultaneous equilibrium of both the markets. Whenever the economy is found not to be in, equilibrium it implies the country is has not arrived at its stability. To push the economic operation towards stability that is to boost the national GDP consistent with full employment level, the government undertakes macroeconomic policies (DeLong and Summers 2012). These policies are implemented through two sets of channel: Fiscal &Monetary Policies.

 While the monetary policy take care of the level of money supply in the economy fiscal policies plays instrumental role to influence economic activity carried out by government expenditure. The level of money supply is pivotal element to determine the rate of interest and price level operating in the economy (Keynes 2016). Based on the economic situations, government adopts expansionary or contractionalry monetary policies by buying bonds and assets or selling them respectively. More money supply implies low interest rate that boosts investment and production that further boosts consumption. To influence overall economy the fiscal policy plays important role that helps economy reach its full employment equilibrium if it is away from it (Kanwal and Nadeem 2013). Government expenditure in forms of initiation of any public project or application or removal of tax are the important instruments of fiscal policies that impacts the overall income and consumption level further.

Effect of the Great Financial Crisis of 2008

In terms of nominal GDP the country performs pretty well and has remarkable reputation for social progression maintained through enormous opportunities and beneficial provisions for mass wellbeing. The country has few core economic problems that are sustaining longer over period. Income level of the country used to be higher compared to western European countries, which fell and persisted to be low after the economic crisis of 1970. This resulted into growth in poverty level over time with rising income inequality (Gertler, Kiyotaki and Queralto 2012). Another major issue with the economy of New Zealand is current account deficit that has been persistent for a long time since the earlier period of 1970s with reaching all time higher -7.8% but fell to -2.6%  of GDP in 2006 (Klemm and Van Parys 2012). This has not increased public debt much higher keeping the amount at 38.4% of the GDP as per the estimation made in 2013 (Storm and Naastepad 2012).

The global  financial crisis and consequent recession in 2008and 2009 had contractionary and adverse impact on the economic outcome of the country affecting confidence of the consumers This not only impacted the consumption decision but also the saving decisions made by them. One of the striking outcomes has been continuous fall in the housing price leading to crisis n the sector. The country has been kept away from accessing the global capital market due to the dominant uncertainty in the world economy. This combined with national fund crisis led to increased cost of credit making investments luxury. The impact on GDP was evidently adverse as the real GDP fell by 2.8% between these years.

As per the responses made by the citizen about the major economic issues of the country, majority of the people mentioned about the housing crisis faced severely even in the larger cities of the country like Auckland. The residents of Auckland mentions about increasing house price of affordability issue (20%), housing shortage and homeless issue consists of 12% of the problem.

The unemployment rate of the country is unacceptably high over years and recorded to be 5.7% as per the estimations made in 2016 (Mertens and Ravn 2012). The unemployment indicates the economy is not at stable equilibrium yet that exhausts the employability of the nation. The money supply has been following a random pattern rising and falling time to time and such movement is highly linked with economic performance and market operations.

Fiscal and Monetary policies

The LM curve explains, L(r, y) = M/P

Money market equilibrium is dependent on the level of real money supply. The increase in OCR reduces the money supply n the economy shifting the LM upward toward left decreasing the money market equilibrium.

In the year 2016-17, the primary focus of monetary policy was to ascertain price stability. For that, the Ministry of Finance carrying al the necessary specifications about how to maintain price stability and keep the inflation within the range of 1-3% n the medium term and maintaining an average inflation of 2% in the near future has set out a Policy Target Agreement. The government lowered the official cash rate as the measure adopted to fight the recessionary impact caused by global downturn (Corsetti et al. 2013). However, as the recovery started the OCR has been increasing over time in order to keep the money supply level monitored. Post Canterbury earthquake rebuild programmers created much demand pressure within domestic economy increasing consumption expenditure. To tackle this situation tight monetary policy was adopted by the government in order to counteract the expected increase in inflation (Mountford and Uhlig 2012). OCR was increased up to 3.5% to contract the supply of fund in the market.

Source: (Author)

Fiscal:                 

The long-term objectives of fiscal policies are the objectives revolving around debt, operating expenditure, revenue and balance along with maintaining net worth of them. The current account deficit and consequent rise in the public debt leads to higher rate of net debt, which was decided to be brought down at 20% of GDP by 2020 (Mertens and Ravn 2013). Deficit can be improved by increasing government revenues (Baker, Bloom and Davis 2016). Imposition of tax has been pivotal instrument for the government.  Another policy to drive down the budget deficit is to cut back expenditure as share of GDP. The Canterbury earthquake caused much instability in the expenditure pattern. During the earthquake in 2011 the spending was much higher at 4.4% and over time was brought down to 0.3% of GDP in the FY 2015-16.  The objective was to maintain operating balance in for of surplus to serve net capital requirement of the government.

Source: (Author)

The IS curve in an economy captures the impact of fiscal policies and effects of changes in the good market equilibrium reflects into national equilibrium as well.

IS equation explains, Y(r, y) = C[y-t(y)]+I(r)+G+NX(y)

Problems faced by the New Zealand economy

When government imposes tax or increases tax levy, the disposable income reduces further cutting back consumption. Moreover government trying to cut its expenditure implies fall in G. as a result the IS curve shifts downward.

The successful adoption of fiscal policies led to low public debt, which over time reduced the deficit pressure on the budget and pushing it towards balanced budget. Strong economic growth is on the cards due to boom in tourism sector and higher inward immigration. The housing shortage was met by increasing more construction, which not only targeted the crisis but also boosted economic activity within nation that increased demand and consumption expenditure (Auerbach and Gorodnichenko 2012). The shortage of household led to higher price of it that further increased household debt of the consumers calling for higher financial risk in the economy. The employment of the country has recorded a shift toward high skilled occupation. With increase in expenditure on education and technical learning the country has higher sources of skills but there has been an allocate issue due to mismatch between jobs and qualifications or skills (Ilzetzki, Mendoza and Végh 2013).The country faces long-term challenges of low growth in productivity and transforming labor market.

Source: (Author)

The reserve Bank has been able to maintain price stability that further brings the financial stability by keeping the inflation around 2% with higher terms of trade, interest rate operating in the economy promoting good health of the money market in the country (Aschauer and Greenwood 2013). The country has been able to boost the employment rate that let the unemployment level to fall to 5% from 7.5%, which is still higher compared to other OECD countries. However, there has been increase in the labor force of the economy, which is positive sign for the economic stability to be achieved with increased outcome.

Conclusion

The above discussion helped us to have a quick snapshot of economy of New Zealand and the existent economic issues operating in the country. It has been found that the country has been responsive to the global downturn of 2007 as evident in the shabby economic performance of the nation during 2008 and 2009. However, with time the government came up with proper fiscal and monetary policies to deal with unstable economic condition. Rising price level due to higher money supply has been correctly monitored and checked from creating inflationary pressure on the economy. As a result, the nation was able to maintain a inflation rate as low as of 2%. The rising unemployment, public debt and budget deficit has been well managed by the specificity of adopted fiscal policies in order to maintain macroeconomic stability.

Reference

Afonso, A. and Sousa, R.M., 2012. The macroeconomic effects of fiscal policy. Applied Economics, 44(34), pp.4439-4454.

Aschauer, D.A. and Greenwood, J., 2013, January. Macroeconomic effects of fiscal policy. In Carnegie-Rochester Conference Series on Public Policy (Vol. 23, pp. 91-138). North-Holland.

Auerbach, A.J. and Gorodnichenko, Y., 2012. management the output responses to fiscal policy. American Economic Journal: Economic Policy, 4(2), pp.1-27.

Baker, S.R., Bloom, N. and Davis, S.J., 2016. Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), pp.1593-1636.

Clemens, J. and Miran, S., 2012. Fiscal policy multipliers on subnational government spending. American Economic Journal: Economic Policy, 4(2), pp.46-68.

Corsetti, G., Kuester, K., Meier, A. and Müller, G.J., 2013. Sovereign risk, fiscal policy, and macroeconomic stability. The Economic Journal, 123(566).

DeLong, J.B. and Summers, L.H., 2012. Fiscal policy in a depressed economy. Brookings Papers on Economic Activity, 2012(1), pp.233-297.

Gertler, M., Kiyotaki, N. and Queralto, A., 2012. Financial crises, bank risk exposure and government financial policy. Journal of Monetary Economics, 59, pp.S17-S34.

Ilzetzki, E., Mendoza, E.G. and Végh, C.A., 2013. How big (small?) are fiscal multipliers?. Journal of monetary economics, 60(2), pp.239-254.

Kanwal, S. and Nadeem, M., 2013. The impact of macroeconomic variables on the profitability of listed commercial banks in Pakistan. European journal of business and social sciences, 2(9), pp.186-201.

Keynes, J.M., 2016. General theory of employment, interest and money. Atlantic Publishers & Dist.

Klemm, A. and Van Parys, S., 2012. Empirical evidence on the effects of tax incentives. International Tax and Public Finance, 19(3), pp.393-423.

Mertens, K. and Ravn, M.O., 2012. Empirical evidence on the aggregate effects of anticipated and unanticipated US tax policy shocks. American Economic Journal: Economic Policy, 4(2), pp.145-181.

Mertens, K. and Ravn, M.O., 2013. The dynamic effects of personal and corporate income tax changes in the United States. The American Economic Review, 103(4), pp.1212-1247.

Mountford, A. and Uhlig, H., 2012. What are the effects of fiscal policy shocks?. Journal of applied econometrics, 24(6), pp.960-992.

Storm, S. and Naastepad, C.W.M., 2012. Macroeconomics beyond the NAIRU. Economics Books.