An early and sustained return to surplus supports stability and growth
Fiscal policy has an important role to play in reducing New Zealand's economic imbalances and vulnerabilities. Eliminating the fiscal deficit and returning to surplus on a sustained basis will contribute to this by restoring the fiscal buffer provided by low debt, increasing national saving, and reducing future borrowing and finance costs.
- Restoring the fiscal buffer. New Zealand's ability to absorb future shocks has been weakened by a series of shocks over the past three years, including the global financial crisis, Canterbury earthquakes, financial sector failures and drought and storms that disrupted agricultural output. These shocks have contributed to a large fiscal deficit and higher government debt than otherwise would be the case and are stretching the limits of the fiscal buffer. Returning to ongoing structural surpluses is the key to restoring the fiscal buffer.
- Increasing national saving. The Savings Working Group made a strong case for lifting national savings. The private sector is already playing its part by strengthening its financial position. The Government will also play an important role in lifting New Zealand's national saving by returning to fiscal surplus. In turn, this will reduce New Zealand's vulnerabilities, and result in lower interest rates and a lower exchange rate than otherwise would be the case. This will help to support the tradable sector to expand.
- Reducing future borrowing and finance costs. This will help to manage the risks posed by New Zealand's high net international liabilities, and further differentiate us from countries that are currently facing financing difficulties. It will help to reduce the risk of a credit rating downgrade. New Zealand's sovereign debt is already on a negative outlook with two international credit rating agencies. If New Zealand were to be downgraded, the cost of borrowing would increase, making it harder and more expensive for our productive industries to invest. Net government bond issuance will fall by over two-thirds next year, and we will begin repaying debt in 2014/15.
Rising finance costs also limit our ability to pursue more worthwhile initiatives. Core Crown finance costs are expected to grow from $3.1 billion in 2010/11 to $5.3 billion in 2014/15. This highlights the need for ongoing scrutiny of government expenditure and investment in order to control finance costs.
