Long-term Objectives

The assets and liabilities in the Government's balance sheet combine in the measure of net worth. One of the Government's key objectives is to reduce debt and improve net worth as a buffer against economic and fiscal shocks of the type experienced by New Zealand during the global economic and financial crisis. We want to reduce net debt back to below 20% of GDP as soon as is practical which means bringing forward the time at which the operating balance before gains and losses returns to surplus.

Figure 8 - Net worth and net worth excluding social assets

Source:  The Treasury

The long-term objectives set last year continue to reflect our view of the levels of the fiscal variables (expenses, revenue, operating balance, debt and net worth) necessary to achieve a prudent long-term fiscal position (see Annex 2). These objectives are consistent with the principles of responsible fiscal management as set out in section 26G(1) of the Public Finance Act (1989) and support the Government's growth agenda. However, the net debt objective was set at a time when debt was projected to remain just above 30% of GDP at the end of the projection period in 2023. The actions the Government has taken and the faster than expected recovery in the economy have improved the debt projections in the year since that objective was set. The Government now wants to refocus attention on the longer-term aim of getting net debt below 20% of GDP by the early 2020s and highlight that we will work towards achieving that level sooner as conditions permit. There has been a minor change to the wording of the objective for net debt to reflect that change in focus.

The charts show projections of key fiscal variables over the period to 2023/24. This is the period to which the long-term objectives relate. The projections up to 2013/14 are based on the economic and fiscal forecasts in the Economic and Fiscal Update 2010.

From 2014/15 onwards the projections are based on the assumptions outlined in Annex 3 of this document.

Figure 8 shows the path of net worth and net worth excluding social assets, while Figure 9 shows the path of net debt. These figures show the deterioration owing to the recession and the results of our actions to restore them consistent with the long-term fiscal objectives.

Figure 9 - Net debt

Source:  The Treasury

Note: Net debt defined as core Crown net debt excluding the NZS Fund and advances

The net worth and net debt indicators are both useful measures of fiscal sustainability because they represent different aspects of that concept. Unlike net debt, the net worth indicators eliminate holdings between core Crown and other parts of the Crown. The net worth indicators also capture changes in non-financial asset and liability values, which are important because movements in those variables can ultimately place a burden on future taxpayers. For example, when the value of the Accident Compensation Corporation's assets falls and its outstanding claims liability rises there is normally an increase in payments from the Crown to the Accident Compensation Corporation. This type of potential impact is the reason we are increasing our focus on the balance sheet. It means we also need to increase our focus on the underlying reasons behind movements in the net worth indicators when we consider the objective for the net debt fiscal anchor.

One of the factors that has allowed New Zealand to come through the global financial crisis relatively well was its good starting position in terms of both debt and net worth. Now that the economy is on the road to recovery we need to continue with the plan of controlling the growth in government expenditure to minimise the build-up of debt and run-down of net worth. We need to rebuild the capacity for debt and net worth to provide a buffer against future events. Some of these future events we know about and need to plan for, like the demographic changes that start to build towards the end of the projection period. Some events are less certain and predictable, like the next downturn or a shock such as a natural disaster, but they could have a dramatic effect on the economy if they happen. The Government has to consider all of these risks and be prepared for them by ensuring it maintains a sound financial position.

We set our objective of positively improving the debt curve last year and the actions the Government has taken have ensured we continue to see forecast reductions in public debt levels over time. In fact, we are projected to reach our longer-term target of net debt of 20% by 2021/22. This does not mean we can afford to relax fiscal settings. Debt will continue to rise while the operating balance is in deficit. Figure 10 shows the total Crown operating balance before gains and losses in 2010/11 is forecast to be -4.2% of GDP. This reduces steadily over future years, reaching surplus in 2015/16. While this is reasonable given the shock we have experienced, getting back to surplus sooner and reducing the peak of debt will help curtail the build-up of debt and associated financing costs. Managing with net debt around the long-term target of 20% and rebuilding net worth will mean we are better placed to deal with any shocks.

Figure 10 - Operating balance

Source:  The Treasury

These are the reasons the Government is committed to living within the $1.1 billion operating allowance and future capital allowances. The intention is to apply any higher than expected revenue to reduce the operating deficit and reducing borrowing requirements. Once we have the deficit and debt under control we will have more choices about how to address longer-term policy challenges discussed in the section above.

Figure 11 - NZS Fund contributions

Source:  The Treasury

One of those choices will be to restart contributions to the NZS Fund. In the 2009FSR the Government decided to suspend contributions until we return to a sufficient operating surplus. We are currently projecting contributions to restart in 2018/19. Under the Fund formula, this means that withdrawals from the Fund commence one year earlier than expected in the 2009 Half Year Economic and Fiscal Update. Because of the current fiscal position we are not expecting to make any additional or one-off contributions before the restart date.

The following table summarises the expected path of the fiscal variables over the forecast period to 2014 and selected points over the projection period to 2024.

Notes:

1. Operating balance before gains and losses
2. Net core Crown debt excluding the New Zealand Superannuation Fund and advances