The Government has a comprehensive policy agenda, which will guide Budget priorities over the parliamentary term. Our main priorities are:
- Responsibly managing the Government’s finances.
- Building a more productive and competitive economy.
- Delivering better public services within tight financial constraints.
- Rebuilding Christchurch, our second-biggest city.
1 Responsibly managing the Government's finances
Structural fiscal deficits and rising debt are not sustainable, nor conducive to higher national saving, rebalancing the economy toward tradable activity or lifting medium-term potential growth. Budget 2011 set a course for fiscal consolidation that would see a return to surplus and over time reduce debt to prudent levels.
Eliminating the fiscal deficit and reducing debt to prudent levels will help the economy cope with future economic and fiscal shocks, including managing risks to the economy flowing from New Zealand's high net external debt position; increase national saving and support higher investment; and directly reduce future borrowing and finance costs. By better controlling government spending, we are freeing up resources in the domestic economy to go to more productive uses. This is a key lever for minimising pressures on interest and exchange rates, especially as Christchurch's rebuilding gets into full swing.
The 2011 Fiscal Strategy Report (FSR) set the long-term objective of restoring the fiscal buffer against future shocks by ensuring that net debt is brought back to no more than 20 per cent of GDP by the early 2020s. The FSR also set the short-term intention of returning the operating balance to surplus by no later than 2015/16, subject to any shocks. It is our intention to achieve this one year earlier – 2014/15 – in accordance with our commitment to the electorate.
Achieving the fiscal strategy requires disciplined control of expenditure. We are confirming future operating allowances, reserved for new expense or revenue initiatives, at $800 million per annum for Budgets 2012 and 2013 and then returning to $1.2 billion per annum, growing at 2 per cent, thereafter. We also confirm commitment to a net zero capital allowance for each of the next five Budgets, requiring new investments to be funded from capital freed up from the balance sheet rather than additional borrowing.
The Government has shown it is capable of delivering Budgets within tight fiscal parameters. Budget 2011 included a net zero operating allowance, which delivered forecasts showing the Government meeting its fiscal objectives while spending on the Christchurch rebuild and reprioritising expenditure toward improved health and education services.
The Pre-election Update presented a fiscaloutlook that was consistent with our fiscal objectives, despitea weaker economic outlook than in Budget 2011. The Treasury's updated fiscal forecasts show this continues to be the case (see Table 1). The Treasury is currently forecasting an operating surplus of $370 million in 2014/15. Net debt is forecast to peak at 29.6 per cent of GDP in 2015/16 and is projected to be brought back to 20 per cent of GDP by 2020/21.
% of GDP (unless otherwise stated)
|Operating balance before gains and losses ($m)||(18,396)||(12,084)||(5,631)||(2,155)||370||2,242|
|Pre-election Update ($m)||(10,809)||(4,438)||(943)||1,450||3,076|
|Operating balance before gains and losses||-9.2||-5.8||-2.6||-0.9||0.2||0.9|
|Core Crown revenue||28.7||28.7||29.6||29.8||30.1||30.5|
|Core Crown expenses||35.2||35.4||32.8||31.4||30.8||30.3|
|Core Crown net debt||20.0||26.3||29.4||29.6||29.6||28.6|
|Total net worth attributable to the Crown||40.4||31.1||28.3||26.8||26.7||27.5|
Source: The Treasury
- Figure 1 - Total Crown operating balance before gains and losses
- Source: The Treasury
- Figure 2 - Core Crown net debt
- Source: The Treasury
The updated fiscal forecasts reflect the Treasury's updated economic forecasts, with slightly lower nominal GDP leading to weaker tax revenue and slightly higher than forecast unemployment resulting in increased benefit expenses. In addition, based on initial indications of the damage caused, the direct costs of the December 2011 earthquakes have added about $300 million to the operating deficit in the current year relative to the Pre-election Update. The extension of the mixed ownership model has also been incorporated into these fiscal forecasts. Some offset comes from lower interest rates reducing expected finance costs and lower CPI inflation reducing some automatic adjustments.
As shown in Figure 3, the main driver of changes to the forecast operating balance relative to Budget 2011 relate to changes in the economic outlook. The large increase in earthquake costs in 2011/12 reflects delays in expenditure from 2010/11, together with the impact of the December earthquakes.
- Figure 3 - Change in forecast operating balance (before gains and losses) relative to Budget 2011
- Source: The Treasury
- Note: ‘Economic changes' captures changes to tax revenue and benefit expenses as a result of changes to the economic forecasts.
The forecast surplus for 2014/15 is not large and is therefore vulnerable to further revisions in forecast tax revenue or expenses. In this highly uncertain global environment, some measure of policy flexibility is needed while maintaining fiscal policy credibility. If the international outlook worsens between now and the Budget, the Government will look at what would be required to meet the surplus target. The Government is aware, however, that 2014/15 is still three years away and that forecast revisions can fluctuate over time both on the upside and the downside.
If the economy were hit by a very severe negative shock, the Government would look at whether retaining the surplus target would actually harm the economy by forcing a sharp reduction in demand. Outside that scenario, we remain firmly committed to achieving a budget surplus in 2014/15.
The supply and confidence agreement between the National and ACT parties recognises that legislative change would constrain excessive future increases in government spending. A spending limit would restrain growth in core government expenses (excluding unemployment benefits, emergencies and interest payments) to no higher than the rate of inflation and population growth. The fiscal strategy with respect to the objectives for the operating balance and debt would be consistent with such a limit.
- The Government's primary indicator of the budget balance, the operating balance before gains and losses (OBEGAL), excludes profits now expected to be attributed to minority shareholders. Further information about the impact of the mixed ownership model can be found on page 6.