Click to download the Finance Minister's post-Budget presentation in PPT

Earlier this month the Reserve Bank released its updated forecasts in its Monetary Policy Statement.

Quite predictably the bank - as shown in this graph - is forecasting economic growth to take a hit this year, as activity is disrupted by the February 22 earthquake and the rebuild of Christchurch is delayed.

However it is forecasting that growth will rebound strongly in 2012 – hitting 5 per cent by the end of the year - and despite some inflationary pressures from the Christchurch rebuild, the interest rate cycle will be relatively subdued.

The bank is projecting that 90-day rates will lift gradually to 4.6 percent by 2014 – a low peak compared with the last cycle, where the official cash rate reached almost double that figure.

That forecast combination of high growth and moderate inflation would be good for the economy and our export industries.

This graph shows the change in employment in the tradable and non-tradable sectors of New Zealand's economy since 2003.

The tradables part of our economy is our internationally competitive industries – exports and manufacturing - while the non-tradables part of the economy is domestically focused sectors like housing and retail.

As you can see non-tradable jobs grew strongly from 2003 to 2009 – up about 300,000 - as New Zealanders borrowed against the rising value of their homes to go on an unprecedented retail spendup. Many of these jobs turned out to be as unsustainable as the borrowing that fuelled them.

By contrast, during this period the tradables sector - the part of our economy that earns our living with the rest of the world – actually went into recession and shed about 55,000 jobs as it was smothered by poor government policy settings, rising interest rates and a rising dollar.

Looking forward, in a credit-constrained world where we need to save more and borrow less, more jobs will need to come from our export industries.

I'm pleased to see that in the last five quarters, jobs in the tradables sector have increased by 25,000 – or about 6 per cent. That growth needs to pick up pace, but it is an encouraging start.

Private credit growth in New Zealand has been relatively flat in the past two years as households and businesses increase their savings, but as this graph shows Government debt is set to climb rapidly in the next few years - peaking at $73.4 billion in 2016/2017 and taking until 2025 to come down to current levels.

We want to lift our national savings – that’s households, businesses and the Government - because it reduces New Zealand’s vulnerability to foreign lenders, reduces pressure on inflation and interest rates and helps exporters by taking pressure off the Kiwi dollar.

However to achieve this the Government needs to reduce its own borrowing, which is forecast to drive up New Zealand’s national debt over the next few years.

The Prime Minister has already outlined moves to get the Government’s accounts back surplus faster and you’ll see more policies in Budget 2011 designed to increase our level of national savings.

November 2010. Recently I’ve talked about the rebalancing that is underway in our economy as a result of people spending less and saving more.

This chart shows whether, at an aggregate level, households are injecting or withdrawing equity from their homes.

It does this by looking at the amount that households are spending on new housing or renovations, and comparing that with the change in the value of mortgages being secured against the housing stock.

When the increase in mortgages is greater than the new investment in housing, this is effectively an equity withdrawal. An example of this is if you increase your mortgage to pay for a holiday. Conversely, when the new investment in housing is larger than the increase in mortgages, this is an equity injection.  An example of this is if you fund your renovations from saving rather than increasing your mortgage.

The chart shows that households undertook a massive equity withdrawal in the middle of the last decade, peaking at over $7 billion in the year to June 2007.

There was a significant change in behaviour after that. Households moved sharply from funding via borrowing to saving, with the equity injection in the year to March 2009 being almost $5 billion.

This turnaround is equivalent to about a 10% reduction in incomes, in terms of household spending.

11 November 2010 - As I’ve said previously, households are changing their behaviour and are spending less and saving more.

This is reflected in this chart - taken from the Reserve Bank’s latest economic forecasts. It shows that consumption as a proportion of GDP, which rose steadily between 2001 and 2007, is now on a long term downswing.

This is helping rebalance our economy towards saving, investment and exports and away from the excessive borrowing and consumption over much of the past decade that led us into recession.

While this adjustment means slightly flatter growth in the short term, it will provide a stronger platform for sustainable economic growth in the future.

This graph shows one of the main indicators of New Zealand’s economic under performance in recent years. It displays our net international investment position, which measures New Zealand’s total debt to the world, including households, business and the Government.

The graph shows that in 2000, our debt to the world was just over $100 billion. It’s now approaching $180 billion and, by 2014, it is forecast to be nearly $250 billion. This large and growing foreign debt is a drain on our national income and makes our economy vulnerable to international shocks.

So we have a big task to turn this economy around and rebalance it towards savings and growth.