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Budget 2007 Home Page Budget Policy Statement 2007

Introduction

This Budget Policy Statement (BPS) sets out the broad strategic priorities by which the Government will be guided in preparing Budget 2007. This includes outlining the overarching policy goals that will guide Budget decisions and the particular areas of focus for Budget 2007, and explaining how the Budget accords with the fiscal strategy that we have previously signalled.

Prudent fiscal management leaves us well-placed to deliver on our key priorities

Figure 1 – Fiscal strategy at a glance
Fiscal strategy at a glance.

Our fiscal strategy is to strengthen the fiscal position to help manage future spending demands, particularly those associated with an ageing population. The strategy is set out in more detail in our most recent Fiscal Strategy Report (FSR) released with Budget 2006. Figure 1 summarises the strategy.

This Government has made considerable progress delivering on our strategy. We have reduced debt to prudent levels and we are also building up financial assets in the New Zealand Superannuation (NZS) Fund. As a result, the Crown’s net financial asset position is positive for the first time since records began in 1972 and probably for the first time in our history.

In June of this year, the Treasury published its first Statement on the New Zealand’s Long-term Fiscal Position. The Statement highlighted two key long-term fiscal challenges facing New Zealand: superannuation and health. We have sound superannuation policy settings generally and we are making progress tackling the long-term challenge by building up assets in the NZ Superannuation Fund to smooth the effects of an ageing population, encouraging private savings with KiwiSaver, and leading by example with the SSRSS. The health challenge is mainly ahead of us, as is the case in other OECD countries, with expenditure growth being driven largely by non-demographic factors. We have been managing operating health spending in the short term to $750 million per annum increases per Budget. We will work to develop a more sustainable funding track for health spending into the future. More broadly, improved finances put New Zealand in a stronger position to manage economic shocks and to deal with projected fiscal pressures highlighted in the Statement. The fiscal progress we have already made and will continue to make over this term means that future governments will have more options available when making future choices about how best to respond to these emerging pressures.

Gross sovereign-issued debt as a percentage of Gross Domestic Product (GDP) stood at 22.5% in June 2006, and is forecast to fall to 20.7% by June 2011. The assets in the NZS Fund are forecast to increase from 6.3% of GDP at 30 June 2006, to reach 13.5% over the same period. The Crown’s positive net financial asset position, that is its net debt position adjusted to take account of the assets held in the NZS Fund, is expected to strengthen to reach 9.7% of GDP, from 1.3% of GDP, over the forecast period.

After NZS Fund commitments of around $2 billion a year and our capital programme are taken into account, the Half Year Economic and Fiscal Update (HYEFU) forecasts indicate that the Government will be running cash deficits across the medium term. That means that we anticipate effectively meeting some of our capital spending commitments from borrowing. This is consistent with our fiscal strategy.

Careful fiscal management is required in the short term due to current macroeconomic imbalances

Through the term of this Labour-led Government, New Zealand has experienced very strong economic growth. We have seen rising real incomes, and very low levels of unemployment. Growth, driven by strength in domestic demand, has been such that labour and capital resources are almost fully used.

Strong domestic demand and a tight labour market have led to a higher rate of inflation, a rise in wage growth and more domestic spending being met from imports. The current account deficit has reached historically high levels as imports have grown and exports have been weak. With high levels of external debt, credit agencies have highlighted the need for the Government to maintain its fiscally prudent approach.

While in the past year economic growth has eased, and there are early signs of a reorientation of the drivers of growth, there are as yet few indications of sustained reductions in macroeconomic imbalances. Indeed, the Reserve Bank has indicated that it views the balance of inflation risks as skewed to the upside. As a consequence, further monetary policy tightening cannot be ruled out while the prospects for any easing in aggregate monetary conditions appear to remain a considerable way away.

The Treasury’s latest economic forecasts show a gradual reduction in the imbalances in our economy. In the very short term, the impact of recent declines in oil prices, combined with the effects of a higher New Zealand dollar, is expected to see headline Consumer Price Index (CPI) inflation fall quite sharply. However, underlying inflation pressures remain strong, with the inflation rate expected to be near 3% by the end of 2007. The current account deficit, meanwhile, is forecast to improve only slowly, with an export recovery and weakening import growth not expected until the 2008/09 year.

Any further significant fiscal expansion by the Government over the short term would risk pushing these expected reductions out – or even exacerbating current imbalances. Inappropriate fiscal policy would also increase the prospects for tighter monetary policy than is already anticipated. Higher interest rates would place additional upward pressure on the exchange rate, which in turn would place more pressure on the export and import-competing sectors and therefore work against the increase in export growth that we all want to see.

Government will continue with its overarching policy goals for the next decade

The focus of our Government has been on making improvements in key social areas, restoring funding in core public services, and investing in the productive capacity of the economy in order to further lift our economic performance and move towards true sustainability. Our overall objective is to continue New Zealand’s transformation into a more dynamic, knowledge-based society, underpinned by the values of fairness, opportunity and security.

Budget 2007 will continue to advance these areas by prioritising new funding on policies to:

  • further enhance New Zealand’s economic transformation
  • continue to improve wellbeing for families – young and old, and
  • strengthen our sense of national identity.
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