Fiscal Strategy

The Government has four priorities, which are to: responsibly manage the Government’s finances; build a more productive and competitive economy; deliver better public services; and support the rebuilding of Christchurch.

Decisions presented in Budget 2013 contribute to meeting all of these priorities.

The Government's fiscal strategy is largely directed at the first priority - responsibly managing the Government's finances - but also impacts on the other three. For example, good fiscal management, which limits growth in government spending, frees up room for the private sector to grow without putting pressure on inflation and, therefore, interest rates. And better management of public assets helps the Government improve the quality of public services.

The fiscal strategy involves:

• maintaining strong fiscal discipline, with key objectives being to return to surplus in 2014/15 and reduce net debt to no higher than 20 per cent of GDP by 2020
• effectively managing the size and composition of the Crown's balance sheet
• ensuring that the way Crown revenue is raised is efficient, stable and provides the right incentives within the economy, and
• introducing appropriate institutional arrangements to manage public spending into the future, while achieving results for New Zealanders.

This strategy, including its short-term intentions and long-term objectives, is consistent with the principles of responsible fiscal management as set out in the Public Finance Act (listed here in Annex 2).

Each of the four parts of the fiscal strategy is important, and is self-reinforcing. But the cornerstone of the Government's fiscal strategy is to get the books in order so it is consistently running surpluses and paying back debt.

Taking on more debt has been appropriate to support the economy and cushion New Zealanders and their families from a number of major shocks including the recession, the global financial crisis and the Canterbury earthquakes.

But, as households around the country know, carrying substantial debt is neither comfortable nor financially prudent.

Annual interest payments on our debt will, this financial year, be similar to spending on the Police, early childhood education and the Unemployment Benefit combined. A sizeable debt also risks keeping interest rates and the exchange rate higher than they would otherwise be, and in turn crowding out the internationally-competitive sectors of the economy.

Getting on top of government debt reduces New Zealand's total indebtedness, which helps to maintain credibility with international lenders and therefore keeps borrowing costs down for businesses and households as well as the Government.

And lower government debt puts New Zealand in a much better position to cope with the next economic shock, or the next natural disaster, to come along. This point has been graphically illustrated by countries that went into the global financial crisis with already high levels of government debt, and are now having to implement harsh austerity measures in an attempt to get their finances back under control.

So the Government is firmly focused on capping, then reducing, its debt.