Overview
The way in which the Government raises revenue and the means by which it spends it have significant impacts on the economy as well as the Government's accounts.
This Government's fiscal strategy is designed to support our wider economic growth objectives.
The short-term aim of the fiscal strategy is straightforward - to return to surplus as quickly as is practical. The fiscal outlook has improved since Budget 2009 last year because growth is picking up more quickly than expected, and because of Budget 2009 decisions to restrain spending growth and postpone tax reductions. However, even with continuing spending discipline and economic growth forecast to strengthen, the operating balance before gains and losses is expected to remain in deficit until 2015/16.
The Government is committed to further improvement. Each year of deficit means an increase in public debt and higher debt servicing costs and increases the vulnerability of the Crown and the economy to further shocks. This vulnerability is heightened at present as the global financial and economic crisis means more countries are seeking to borrow more, and there is increased concern from investors about the risk around government debt.
Last year the Government absorbed some of the impact of the recession and protected New Zealanders from the hardest edges of recession. Low public debt levels provided a buffer. A key fiscal objective is to restore this bulwark against external shocks and return net public debt to 20% of Gross Domestic Product (GDP).
Balancing the books and lowering debt provides choices around future fiscal policy and better prepares the country for future shocks, the ongoing pressures on spending and revenue and with the impacts of demographic change.
In the 2010 Budget Policy Statement (BPS) the Government indicated that Budget 2010 would set out the next steps in the Government's economic growth strategy while continuing the emphasis on sound public finances.
The Government's focus is on rebalancing the economy towards more sustainable growth. The fiscal strategy is designed to complement our growth framework, which is based around six policy drivers: a better regulatory environment for business; improved skills and education; quality infrastructure; innovation and business support; improved public sector performance; and tax.
Addressing economic imbalances and helping shift the make-up of growth from the non-tradable to the tradable sector means constraining the growth in government expenditure. Expenditure and debt control help maintain strong credit ratings and improve the cost and access to capital for business. Government fiscal discipline eases the pressure on monetary policy and allows interest and exchange rates to sit at lower levels than they otherwise would.
The most obvious change to the way in which fiscal strategy is being used to drive growth is in the Budget tax package. Tax changes are designed to deliver a sustainable future revenue stream and to shift the balance of the tax system towards those taxes that are less harmful to growth. The tax changes that take effect from 1 October 2010 will lift the real incomes of the vast bulk of households and improve the fairness of the tax system. The tax package will improve incentives to save and help direct investment into more productive areas. Growth in the productive areas of the economy is the best way of reducing the current economic imbalances.
The other contribution this Budget makes to accelerating economic growth is through better delivery of government services. New spending has largely been directed to areas of frontline social services, notably health and education, and the drivers of growth: infrastructure and innovation. We intend delivering good value from new spending. We also want to drive increased value from the $70 billion of existing spending. This Government aims to increase productivity in the public sector rather than growth in public sector spending.
Better fiscal management also requires taking a far more comprehensive approach to managing the Crown balance sheet. Adopting this approach means we are looking at all of the Government's $217 billion of assets and $118 billion of liabilities to ensure our investments and risks are managed effectively. Poor returns from these assets cost the taxpayer as much as higher operating expenditure.
