Long-term Fiscal Objectives

The Government's long-term fiscal objectives remain unchanged. The focus is to bring net core Crown debt back to a level no higher than 20 per cent of GDP by 2020. The Government will run operating surpluses and cash surpluses consistent with this debt objective, while also meeting the Government’s net capital requirements.

There is, of course, a wide band of uncertainty around medium- and long-term projections, and the Government does not intend to be a slave to the 20 per cent debt target in every Budget.

However, the Half Year Economic and Fiscal Update showed the Government was some way off meeting this long-term debt target, with net debt projected to be almost 25 per cent of GDP in 2020/21. The Government has therefore decided to delay resuming contributions to the NZS Fund until net debt falls below 20 per cent of GDP (Box 2).

Figure 8 - Total Crown operating balance (before gains and losses)

Source:  The Treasury

As a result of this change, net debt is now projected to reach 17.6 per cent of GDP in 2020/21, in line with the Government's long-term objective. NZS Fund contributions are therefore also projected to resume in 2020/21 - two years later than was projected in the Half Year Economic and Fiscal Update.

Past 2014/15, operating surpluses are expected to increase each year (Figure 8). Cash surpluses are expected from 2017/18 onwards (Figure 9), at which point net debt will start to reduce in dollar terms.

Figure 9 - Core Crown residual cash

Source:  The Treasury

As a percentage of GDP, net debt is expected to stay under 30 per cent of GDP and start reducing after 2014/15 (Figure 10).

A broader measure of the strength of the balance sheet - total Crown net worth - is expected to start consistently increasing as a percentage of GDP from 2014/15 (Figure 11). Most of the ongoing balance sheet strengthening reflects debt reduction.

Net worth is projected to have recovered to pre-crisis levels by the mid-2020s.

Figure 10 - Net core Crown debt

Source:  The Treasury

Operating surpluses require revenues to exceed expenses. Figure 12 shows the projected paths for core Crown revenue and expenses. Revenue is projected to increase as a proportion of GDP until 2020/21, after which it is assumed to remain broadly stable.

Figure 11 - Total Crown net worth

Source:  The Treasury

Ongoing expenditure restraint is essential for New Zealand's long-term fiscal sustainability and to put the country back on a sustainable growth path, with economic growth led by the private sector. The Government will restrain its spending so that, over time, core Crown expenses are reduced to below 30 per cent of GDP and remain well under that level. Core Crown expenses are expected to remain well below the level of the spending limit outlined in Budget 2012, for the next decade.

Figure 12 - Core Crown revenues and expenses

Source:  The Treasury

These longer-term projections show a remarkable turnaround in the Government's books, compared to what was expected only a few years ago. Projections done as part of Budget 2009, for example, showed that if the Government had maintained the spending track it inherited, and hadn't made policy changes, net debt would exceed 60 per cent of GDP by the early 2020s (Figure 10).

But it is crucially important when looking at long-term projections, and even when looking at short-term projections, to recognise that these are simply assumptions in a spreadsheet, or inputs to a model, until actual decisions are made in the real world. While the fiscal outlook has improved markedly over the past few years, there is a lot of work to be done to make the forecasts a reality. At its peak, in 2016/17, net debt is expected to reach $70 billion, or around $15,000 for each and every New Zealander.

The Government, on behalf of all New Zealanders, has to be focused on reducing this debt. History is littered with examples of countries that were prepared to take on debt during bad economic times, but were not prepared to pay back that debt when their economic fortunes improved.

The Government's long-term fiscal objectives are set out formally in Annex 1. The fiscal projections in Figures 8 to 12 assume a continuation of current government policy settings, including operating and capital spending, until the end of the projection period. They show the central projection based on the assumptions outlined in Annex 3.