Responsibly managing the Government's finances
Operating deficits, and the subsequent increases in government debt, have been appropriate responses to the recession, the global financial crisis and the Canterbury earthquakes. The Government has absorbed much of the shock of these events on its own balance sheet.
However, that build-up of debt could only ever be temporary. Returning to an operating surplus, and starting to bring debt down to more prudent levels, will allow the Government to build New Zealand's resilience to future shocks, help lift national savings and reduce future finance costs.
On coming into office in late 2008, the National-led Government was presented with forecasts showing permanent structural deficits and ever-increasing government debt. The Government has worked hard to turn that situation around by reining in spending, despite the significant additional costs from the Canterbury earthquakes.
- Figure 1- Total Crown operating balance before gains and losses
- Source: The Treasury
- Figure 2 - Core Crown net debt
- Source: The Treasury
In the interests of taxpayers, it is important that we lock in longer-term control of expenditure through ongoing public sector reform. That will enable us to start repaying debt and build a buffer against future economic shocks and natural disasters.
The Half Year Economic and Fiscal Update shows the Government remains on track to meet its target of posting an operating surplus in 2014/15 and of keeping net core Crown debt below 30 per cent of GDP.
The effect of slightly weaker economic forecasts on tax revenue has been partially balanced out by a forecast decrease in expenses, in particular welfare payments and finance costs. Lower inflation and wage growth result in lower expected adjustments to benefit payments, particularly New Zealand Superannuation payments, while lower interest rates reduce the cost of borrowing.
- Figure 3 - Core Crown expenses
- Source: The Treasury
The forecast surplus for 2014/15 remains modest at only $66 million, and is at risk from a further deterioration in the world economy.
The Government remains focused on keeping its spending under control, while being aware that its revenue may vary according to economic conditions over the next few years.
The latest forecasts show the Government is on track to reduce core Crown expenses to around 30 per cent of GDP by 2015/16. In that year, expenses are forecast to be 30.3 per cent of GDP, down from a peak of 35.1 per cent of GDP in 2010/11.
Spending restraint will continue to take pressure off inflation and interest rates and help to free up resources for the tradables sector.
This Budget Policy Statement confirms operating allowances of $800 million for Budget 2013, returning to $1.2 billion for Budget 2014 and growing at a rate of 2 per cent a year for subsequent Budgets.
To keep to these operating allowances, we will continue to reprioritise spending into higher-priority areas and require government departments to find efficiencies as part of the Four-year Plan process.
The Government also confirms its Budget 2011 commitment to use existing sources of funding on the Crown balance sheet to finance capital investments over the next four Budgets.
New capital spending over this period will be funded from reprioritising existing capital and, in particular, from the proceeds from the Government share offers, which are expected to raise between $5 and $7 billion. The Government will put this money into the Future Investment Fund and use it to invest in new public assets. This is $5 to $7 billion, therefore, that taxpayers do not have to borrow.
Budget 2013 will set out more details of allocations from the Future Investment Fund for capital investment in priority public assets such as schools and hospitals, and investing in Christchurch. This will support jobs and provide long-term physical and social infrastructure.
|
June Years % of GDP (unless otherwise stated) |
2012 Actual |
2013 Forecast |
2014 Forecast |
2015 Forecast |
2016 Forecast |
20171 Forecast |
|---|---|---|---|---|---|---|
| Total Crown indicators | ||||||
| Operating balance before gains and losses ($m) | ||||||
| Half Year Update ($m) | (9,240) | (7,340) | (2,011) | 66 | 1,383 | 2,048 |
| Budget Update ($m) | (7,897) | (2,013) | 197 | 2,102 | ||
| Operating balance before gains and losses | ||||||
| Half Year Update | (4.4) | (3.4) | (0.9) | 0.0 | 0.6 | 0.8 |
| Budget Update | (3.6) | (0.9) | 0.1 | 0.8 | ||
| Total net worth attributable to the Crown | ||||||
| Half Year Update | 28.5 | 26.1 | 24.7 | 24.6 | 25.1 | 25.9 |
| Budget Update | 29.6 | 28.1 | 27.9 | 28.6 | ||
| Core Crown indicators | ||||||
| Core Crown revenue | ||||||
| Half Year Update | 29.1 | 29.1 | 29.6 | 30.0 | 30.1 | 30.2 |
| Budget Update | 29.5 | 29.8 | 30.2 | 30.5 | ||
| Core Crown expenses | ||||||
| Half Year Update | 33.2 | 33.3 | 31.4 | 30.8 | 30.3 | 30.1 |
| Budget Update | 33.8 | 31.5 | 30.7 | 30.2 | ||
| Net Core Crown debt | ||||||
| Half Year Update | 24.3 | 27.8 | 29.2 | 29.5 | 29.5 | 29.3 |
| Budget Update | 28.1 | 28.7 | 28.6 | 27.7 | ||
1. The Budget Update forecasts the five-year period from 2012 to 2016.
Source: The Treasury
The Government's return to surplus will require continuing control of the long-term drivers of costs in areas such as welfare, health, education and law and order.
Returning to surplus is the next step in its medium-term fiscal strategy, but it is by no means the end of the process. The Government is also looking to rebuild the buffers used to cushion the impact of the economic and seismic shocks that have hit New Zealand in recent years.
This means not only returning debt to prudent levels, but also rebuilding other elements of the Government's balance sheet, including resuming contributions to the NZS Fund when the surplus is sufficiently large, and rebuilding capacity to deal with future natural disasters.
Effective long-term policy and balance sheet management will deliver secure surpluses, which will then give us choices, such as repaying debt, resuming payments to the New Zealand Superannuation Fund and investing in priority public services.
