The GDP of a country is made up of four things: C+I+G+(X-M).
C = Private Consumption
I = Business Investment
G = Government Demand
(X-M) = Net Exports
With government spending being very liberal and effective in creating growth there is a need for the other components of GDP to do their part – Private Consumption, Business Investment and Net Exports.
It is interesting to look at government spending as a % of GDP in New Zealand over the last 30 years. It follows a familiar pattern that relates to the Government of the day. As with most economies a government that is more left wing tends to spend more and a government that is right wing tends to spend less. However the graph can be a bit misleading as although spending went down under a National Government as a percentage of GDP, it could mean that spending could have been increasing but overall GDP going up at a much higher rate.
Source: Westpac
A major factor that will support GDP growth over the coming years is the large increase in fiscal spending including:
- Approx $1.5bn of spending per annum on transfers to low and middle-income households as part of the Families Package.
- Approx $8.5bn of spending over the coming four years in areas like health, education and infrastructure.
These increases in fiscal expenditure will see Government consumption spending growing by around 4% per annum through 2019 and the early 2020s. That’s roughly double the pace seen over the previous decade, and will see the Government’s share of economic activity rising from around 18% at present to over 20% in the early 2020s. The impact of this spending will be seen across the economy and will help to support employment growth.
Source: Westpac Overview February 2019
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