Taking steps to keep Government debt under control

The previous Government increased its spending markedly over recent years. In the absence of any policy response, the future path for Government spending, together with the weak outlook for revenue over the next few years, would result in permanent budget deficits and in Government gross debt rising from 20 percent of GDP to 70 percent of GDP by 2023.

At 70 percent of GDP, the Crown's gross debt would translate to around $45,000 for every New Zealander. Simply paying the interest on this debt would impose a huge cost on the New Zealand economy. The Government's own borrowing costs would rise, meaning that less money would be available to fund public services. Future generations would be weighed down by a large debt burden.

The Government finds that outlook completely unacceptable.

Budget 2009 demonstrates the Government's strong commitment to getting its budget balance back into surplus, to keeping the increase in Crown debt to a manageable level and to eventually lowering this debt.

Reducing deficits, and bringing debt back under control, requires:

• restraining growth in government spending
• maintaining the Crown's revenue base in future years, and
• better ongoing management of the Crown's assets and liabilities.

Budget 2009 addresses each of these areas.

As a result of the measures adopted in this Budget, government gross debt is expected to reach a peak of only 43 percent of GDP in 2016/17, as shown on page 1, before beginning to decline as a percentage of GDP.

Figure 4 - Net debt with and without Budget 2009 policy changes

Source: The Treasury

In the future, the Government will be focusing on managing assets as well as liabilities, to provide a complete picture of the Crown's fiscal position. We will therefore be using net debt as our preferred fiscal indicator, as explained in the Fiscal Strategy Report (FSR). As a result of the measures adopted in this Budget, net debt remains under 40 percent of GDP throughout the projection period and begins to trend downwards after 2016/17 (figure 4).

Getting debt under control has involved making a number of difficult choices.

First, the Government has decided to reduce its operating allowance for new budget spending to a maximum of $1.1 billion in 2010/11. For following Budgets, the operating allowance will grow at a rate of 2 percent per annum. The allowance for new capital spending will remain at $1.45 billion in future Budgets, until increasing to $1.65 billion in Budget 2013.

Figure 5 - Operating allowances (excluding revenue initiatives)

Source: The Treasury

These operating allowances will be considerably smaller than recent allowances, making the Government's focus on value for money in the public sector even more important.

Second, the Government has decided to delay the personal income tax cuts scheduled for 2010 and 2011.

This Government believes that lower personal income taxes benefit the economy, by providing incentives to work hard and get ahead. Lower taxes make New Zealand more attractive for skilled people and graduates. However, the severity of the current recession means that the tax cuts scheduled for 2010 and 2011 are currently unaffordable.

Even with the measures we are taking in this Budget, the operating balance before gains and losses is forecast to record deficits of $7.7 billion in 2009/10 and $9.3 billion in 2010/11. In these circumstances, the Government would have to borrow even more than it already plans to, in order to pay for tax cuts. That would be reckless.

As part of future budget processes, the delayed tax cuts will be assessed to see if they are affordable.

Figure 6 - Operating balance before gains and losses

Source: The Treasury

Finally, the Government has decided to suspend automatic contributions to the New Zealand Superannuation Fund (NZS Fund), as permitted by the Fund's governing legislation.

This will not affect people's entitlements to New Zealand Superannuation. The Government's commitment to maintaining these is absolute. New Zealand Superannuation will continue to be paid at a minimum 66 percent of the average wage, from the age of 65. Future funding at this level is locked into the Government's long-term spending path and is reflected in all of the Budget projections.

The NZS Fund was established as a way to set aside budget surpluses. Those budget surpluses no longer exist, so the Government would have to borrow to make its full NZS Fund contributions. Next year the Government would have to borrow just under $30 million a week, or $1.5 billion a year, to put into the NZS Fund, to invest mainly in global financial markets. This contribution would have grown to over $2 billion per annum over the next decade, with a corresponding increase in debt.

The Government has therefore decided not to make the required contributions to the NZS Fund until the operating balance is sufficient in terms of cash flow to meet contributions and other capital spending. Future contributions are scheduled to recommence from 2020/21 and will continue for a decade until withdrawals from the Fund begin around 2031. The existing investments will remain in place in the interim.

As at 31 March the Government had approximately $30 billion invested through its various Crown Financial Institutions. About half of this was in growth assets. The government will accordingly benefit or lose substantially from future fluctuations in these markets.

In the meantime, the Government will consider on an annual basis whether to make any partial contributions to the Superannuation Fund.

In 2009/10, the Government will make a contribution of $250 million. This is to assist the Fund to find suitable investment opportunities in New Zealand, and to supplement the supply of capital to local businesses. The contribution is consistent with the Government's policy of increasing the proportion of the Fund's assets that are held locally.