The Fiscal Plan
Decisions for Budget 2009 were made during the global financial and economic crisis. In the 2009 Fiscal Strategy Report (FSR), we set out a plan that balanced short-term support for the economy with steps to deliver a prudent fiscal position in the medium to long term. Our view of a prudent fiscal position still accords with the long-term objectives set in Budget 2009 for the five fiscal variables (expenses, revenue, operating balance, debt and net worth). We have retained those objectives, with a modification to the wording of the debt objective, and Budget 2010 delivers the next step in the plan for working towards those objectives.
Last year the Government significantly slowed the rate of expenditure growth, reducing its new operating allowance in Budget 2009 from $1.75 billion to $1.45 billion. It also committed to meeting new initiatives from within a maximum operating allowance of $1.1 billion, increasing at 2% each year from 2011/12.
The plan outlined in Budget 2009 got the balance about right. New Zealand has weathered the crisis better than many major economies and the fiscal outlook has improved since last year's Budget and the half-yearly update. The expected peak in net debt has fallen from 36% in Budget 2009 to a peak of 27% in the current projections. The operating balance before gains and losses was last year expected to be in deficit until 2018/19 but now we expect to return to surplus in 2015/16.
While the economy is now growing again, risks remain. The 2010 Budget Forecasts are based on the expectation that our main trading partners will recover this year, though a further downturn could occur. In this event, the global economy is likely to be less resilient given the higher debt and weaker balance sheets of governments and the limited capacity of monetary and fiscal policy to help given current settings. New Zealand households are similarly stretched, with high debt to income ratios and the country's net overseas liabilities around 90% of GDP.
These outcomes reflect the unbalanced nature of growth over the past decade. Household consumption boosted by borrowing, and increased government expenditure have been the major areas of growth. Government spending grew over 50% in the five years to 2009, more than twice the nominal economic growth. By contrast, real output from exporters and import-competing industries, often termed the tradable part of the economy, is now about 12% smaller than in 2005.
These trends highlight the multiple challenges that faced Budget 2010. Not only did the Budget need to be fiscally responsible, and take steps to begin to reduce vulnerabilities, it also needed to help switch resources back towards the more productive sectors and reverse the decline in long-term growth rates.
