Past Fiscal Performance
When the National-led Government presented its first Budget in 2009, it did so against the backdrop of a sharp recession that had started in early 2008, and the impact of the worst global financial crisis since the 1930s. In the absence of policy change, the outlook was for never-ending deficits and exploding levels of government debt. On top of this, New Zealand subsequently experienced the Canterbury earthquakes, a slower-than-expected global recovery and the impact of the Retail Deposit Guarantee Scheme (RDGS), each of which had a significant effect on the Crown's financial position.
The Government's plan throughout this time was to support the economy in the short term by running operating deficits (reflecting lower tax revenue and higher spending on items such as benefits), but then to reduce these deficits by slowing growth in government expenditure as the economy recovered.
This approach provided support to the economy when it was most needed, and cushioned New Zealanders and their families from the effects of the recession. However, it did so within a clear framework which would deliver a prudent fiscal position with operating surpluses and net debt around 20 per cent of GDP in the medium term.
In 2010/11, the operating deficit reached a peak of $18.4 billion, or 9.2 per cent of GDP (Figure 1), with around half of this deficit reflecting the one-off effects of the Canterbury earthquakes and the RDGS. That deficit halved the following year, is expected to reduce to $6.3 billion in 2012/13 and is forecast to return to surplus in 2014/15.
- Figure 1 - Total Crown operating balance before gains and losses
- Source: The Treasury
Part of the improvement reflects the unwinding of many of the one-off expenses. But it also reflects a slowing of the growth rate of expenses relative to tax revenue and GDP.
The Government's operating surplus (or deficit) is equivalent to a business's underlying profit (or loss) - it is the Crown's revenue minus its expenses. Similar to businesses, the Government also records cash flows as a result of its operating and capital activities.
This is important because cash deficits need to be funded by borrowing, while cash surpluses are available to pay back debt. The Crown has posted cash deficits since 2008/09, and these peaked at $13.3 billion in 2010/11.
As a result, the Crown's net debt has risen from $17.1 billion in 2008/09 to an expected $58 billion in the current year, 2012/13, and is still rising. As a percentage of New Zealand's GDP, net debt is still well below the OECD average, and below most of the countries it is typically compared with (Figure 2). But it is still a sizeable level of debt, and is currently rising by around $130 million a week, on average over the next financial year.
- Figure 2 - General government net financial liabilities, 2012
- Source: OECD Economic Outlook No 92 December 2012
Note: The OECD data for New Zealand differs from the Treasury's net core Crown debt data owing to differences in methodology and coverage.
Running deficits and building up debt has been the appropriate response to the challenges the economy has faced over the past five years. But this build-up in debt has to be reversed and the Government is committed to reducing net debt to more prudent levels. This will require running persistent cash surpluses to pay off debt.
While the Government has been running deficits, it has also been very active in restraining spending, and in particular addressing some of the long-term drivers of this spending. Over five Budgets, the Government's new spending and revenue initiatives in the final year of the forecast periodhave totalled less than $1.7 billion, or an average of around $330 million per Budget. The equivalent over the last five Budgets of the previous government was a total of $19 billion, or an average of $3.8 billion per Budget.
Spending restraint has been achieved in a number of ways, including: reprioritising spending from lower-value to higher-value activities; reducing Budget operating allowances (including two net-zero Budgets in 2011 and 2012); reducing the cost escalations built into existing policies; and driving better efficiency and better results from the public sector.
At the same time, the Government has continued to invest in the productive capacity of the economy and in major infrastructure projects.
As a result of the Government's responsible financial management, the fiscal outlook has improved markedly over only a few years. Early decisions the Government took to improve the fiscal position have had a large impact on the projections for future years because of the compounding effects of lower interest costs and lower debt levels, and the compounding effects of lower operating allowances.
