Hon Bill English
Minister of Finance

6 March 2011 Media Statement

Govt considers balanced quake policy response

The Treasury’s preliminary assessment of the Christchurch earthquake’s economic impact confirms the need for the Government to carefully consider its priorities, Finance Minister Bill English says.

It also points out that economic growth was slower than forecast previously, even before the latest earthquake. This reflects soft domestic demand – as New Zealanders save more - despite exporters benefiting from higher commodity prices.

“At this early stage, our immediate focus is on getting good information about Christchurch’s requirements, and that will tell us more about the scope of the prioritising we need to do,” he says.

“Since being elected in 2008, the Government has taken the approach of protecting the most vulnerable and any spending changes we make will ensure that continues

“Paying for the earthquake will likely involve a balanced combination of a bit more borrowing in the short term and reconsidering our spending priorities, so we can provide the financial resources needed to help rebuild Christchurch and the Canterbury economy.

“And we’ll also press on with our broader economic programme to reduce New Zealand’s vulnerability to foreign lenders, get the Government’s finances in order and build faster growth based on higher national savings and exports.”

In its Monthly Economic Indicators issued today, the Treasury provides a preliminary assessment of two aspects of the earthquake:

• It estimates the total financial cost of damage from the earthquake at between $10 billion and $15 billion – two to three times the estimated $5 billion cost of the first earthquake last September. This will be shared between central government, insurers, local government and businesses.

• In addition, the wider economic impact of the earthquake, combined with already slower economic growth than forecast in the Half Year Update in December, could leave nominal GDP a cumulative $15 billion lower over the five years to 2015. That is equivalent to about 1.5 per cent of the total value of GDP over this period.

“We're still working through the potential impacts of the earthquake on GDP and the flow-through to tax revenue,” Mr English says. “But based on these early assumptions, the total loss of tax revenue from all of these factors could be in a range of $3 billion to $5 billion over the five years.

“This is manageable in the context of the Government’s revenue base of about $330 billion over the five years.

“It’s clear that the earthquake will have an impact on the Government’s finances – through both increased costs and reduced tax revenue.

“We will work through those issues carefully as we prepare for the Budget over coming months,” Mr English says.

The Treasury’s Monthly Economic Indicators publication, which includes its preliminary earthquake assessment, is available at:

http://www.treasury.govt.nz/economy/mei

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