Maintaining Firm Control of the Government's Finances

The short-term aim of the fiscal strategy is to return to surplus as quickly as is practical.

The fiscal outlook is improving, thanks in part to the positive impact of Budget 2009 decisions to restrain the rate of growth of government spending.

Figure 9 shows how, from the situation of explosive debt levels which the Government faced in late 2008, net debt is now forecast to peak at 27% of GDP in 2014/15, falling to 14% of GDP at the end of the projection period in 2023/24.

Figure 9 - Net debt

Source:  Source: The Treasury

GDP figures include historical revisions made by Statistics New Zealand in December 2009. Previous projections have been adjusted for these, to ensure comparability across years.

However, deficits are still forecast until 2015/16. It was sensible during the crisis for the Government to absorb some of the impact of the shock and protect New Zealanders from the hardest edges of recession. But with the crisis receding and the economy growing again, now is the time to start bringing the accounts back into surplus.

Current projections show that it will require a further decade of disciplined fiscal management to deal with the effects of the global financial crisis and the huge lift in Government spending during the boom years leading up to that crisis.

Reducing debt to more prudent levels is important for a range of reasons. It reduces vulnerability to future shocks, limits the increase in finance costs, and provides future Governments with more fiscal options.

Low government debt is particularly important for New Zealand in light of the country’s high net foreign liabilities (see Figure 10). We have seen increasing concern about public debt in recent times, and a number of countries around the world are having to consider or enact painful cuts to public services or increase taxes as a result of unsustainable debt levels.

Figure 10 - Net international investment position (Q2, 2009)

Source:  Statistics New Zealand, IMF, Ministry of Finance Japan, The Treasury

New Zealand has one of the highest net external debt positions in the world – reflecting a combination of household, business and government debt. Low government debt before the crisis had been one of the offsetting considerations to both international investors and rating agencies when they were assessing the country’s riskiness. This cannot be taken for granted. The Government is committed to continuing maintaining New Zealand’s creditworthiness and limiting the cost of credit to domestic borrowers.

Responsible government spending is a key tool in containing the long term debt outlook. The 2009 Fiscal Strategy Report (FSR) set the new operating allowances at a maximum of $1.1 billion (growing by 2% per year from 2011/12) in order to attain the long-term net debt objective. Budget 2010 has remained within this allowance. The 2010 FSR reiterates the Government's ongoing commitment to this allowance in future Budgets.