Returning to Surplus and Reducing Debt Remains the Key Priority

Structural fiscal deficits[1] and rising debt are not sustainable, nor conducive to the medium- and long-term goals of rebalancing the economy towards tradable activity and lifting potential growth. Eliminating the fiscal deficit and reducing debt will help to:

• restore the fiscal buffer against future adverse events. Future surpluses will allow the Government to bolster the country's resilience to future shocks. The longer the operating balance remains in deficit, the fewer options there are to deal with future economic shocks and longer-term fiscal pressures. Treasury projections show that delaying a return to surplus by two years, to 2016/17, would increase core Crown net debt by around 5.5 per cent of GDP ($16.7 billion) by 2019/20 (Figure 1).

Figure 1 - Core Crown net debt

Source:  The Treasury

• increase national saving and support higher investment. Households and businesses are strengthening their financial position by paying off debt and increasing savings. The Government has been supporting the economy through the downturn, but now needs to help lift New Zealand's national savings by returning to sustained fiscal surpluses. Disciplined spending and sustained surpluses will allow for lower interest rates and exchange rates than otherwise would be the case and is a policy mix more conducive to growth in the tradable sector.
• reduce future borrowing and finance costs. Maintaining a clear commitment to return to surplus and reduce debt will differentiate New Zealand from many other countries and ensures international markets will continue to lend to New Zealand at relatively low interest rates. Reducing the Crown's finance costs also gives the Government flexibility to pursue more worthwhile and productive initiatives.

As discussed on page 9, budget deficits and increases in government debt over recent years have been appropriate in order to absorb much of the shock of the recession, the global financial crisis and the Canterbury earthquakes. Between 2009 and 2011, the fiscal impulse was equivalent to around six per cent of GDP (Figure 2).

Figure 2 - Core Crown fiscal impulse[2]

Source:  The Treasury

However, that fiscal stimulus, and the resulting build-up in debt, could only ever be temporary. Since Budget 2009, the Government has been charting a course to tighten spending, return to surplus, cap the increase in public debt as a share of GDP and bring this debt down to more prudent levels.

Developments over the past year have threatened to delay the return to surplus. Global growth has been lower than expected, further seismic activity in Canterbury has delayed rebuilding, and costs in a number of areas - including the Accident Compensation Corporation (ACC) and the Earthquake Commission (EQC) - have been higher than previously expected.

The Government is taking the opportunity to deliver a "zero Budget", where new spending over the forecast period is matched by a combination of savings and revenue initiatives (Table 1).

As a result, the fiscal forecasts continue to show a budget surplus being achieved in 2014/15. Fiscal policy is expected to be contractionary over the forecast period (Figure 2).

The forecast new operating allowances for future Budgets remain as they were in the BPS. The allowances in Budgets 2013 and 2014 are $800 million and $1.19 billion respectively, rising after 2014 by two per cent in each Budget.

Note: Numbers may not add exactly to the stated totals owing to rounding

To limit borrowing, the Government also remains committed to spending no new money on capital projects in this and the next four Budgets. New capital investments will be funded from capital freed up from the Crown's balance sheet - including through partial asset sales - rather than from additional borrowing.

The fiscal forecasts show net Core Crown debt peaking at 28.7 per cent in 2013/14.