Short-term Fiscal Intentions

The Government's focus in the short term - that is, over the forecast period to 2016/17 - is on returning the total Crown operating balance before gains and losses to a surplus no later than 2014/15. The Government is also focused on returning to cash surpluses so it can begin to pay off debt. Meeting these targets requires continued spending restraint.

Budget forecasts show the Government meeting its key short-term target, with an operating surplus in 2014/15 of $75 million (Figure 3).

Figure 3 - Total Crown operating balance (before gains and losses)

Source:  The Treasury

Core Crown residual cash is forecast to remain in deficit throughout the forecast period, which means the level of net core Crown debt will continue to rise. However, as a share of GDP, net debt is forecast to peak at 28.7 per cent in 2014/15, and decline thereafter (Figure 4).

Figure 4 - Net core Crown debt

Source:  The Treasury

While core Crown expenses continue to rise in dollar terms (Figure 5), they are falling as a share of GDP. Core Crown expenses are forecast to drop below 31 per cent of GDP in 2014/15 – down from 35 per cent just two years ago – and then remain well under that level.

Figure 5 - Core Crown expenses

Source:  The Treasury

The priority given to managing the Government's finances means that there is, and will continue to be, limited new operating spending each year. Operating allowances have been revised to $900 million in Budget 2013, $1 billion in Budget 2014 and growing thereafter at 2 per cent per Budget. The change to future allowances will mean less spending, bigger surpluses and more ability to pay down debt (Box 1).

In addition, there will continue to be no new money set aside for capital spending over this and the following three Budgets. New capital spending will be funded from the Crown’s balance sheet, and in particular from the proceeds of the Government’s share offers, which are expected to free up $5 billion to $7 billion for new investment in public assets.

The Government's return to operating surplus is not dependent on the Mighty River Power share sale. The share offer programme effectively swaps one type of asset for another - electricity company shares for cash - so its primary effect is on the mix of assets and debt that the Government owns, rather than on the operating balance. Changes in the Crown’s balance sheet over the short term are outlined in the section below on Managing the Crown’s Balance Sheet.

Having been stimulatory during the recession, fiscal policy is expected to exert a mildly contractionary effect on the economy throughout the forecast period. This is illustrated in Figure 6, which shows the “fiscal impulse” - an estimate of the impact on demand of the change in fiscal position from year to year. As a result, fiscal policy will operate in support of monetary policy and allow interest rates to be lower than they would otherwise be.

Figure 6 - Fiscal impulse

Source:  The Treasury

Ongoing spending restraint is a major part of the Government's fiscal strategy. But spending restraint is not a handbrake on providing better public services. In fact, big increases in spending have often been a measure of failure, rather than a measure of success. Government spending increased 50 per cent over just five years in the mid-2000s with little, in the end, to show for it.

This Government, in contrast, is focused on driving innovation and results in the public sector. And, in turn, better results from public services will create downward pressure on government spending in the future, through results such as lower reoffending rates and better health outcomes.

The Government's short-term fiscal intentions are set out formally in Annex 1.