Responsibly managing the Government's finances
Mr Speaker,
I want to talk now about the first of the Government's four priorities, which is to responsibly manage the Government's finances.
The Budget shows that the Government is on track to meet its two key fiscal targets.
We are on track to get back to surplus by 2014/15.
And we are on track to reduce government debt to 20 per cent of GDP by 2020.
Budget forecasts show an operating surplus before gains and losses of $75 million in 2014/15.
We are achieving this while still spending $5.1 billion on new initiatives in the current year and over the next four years in Budget 2013 - funded, in part, by reprioritising existing spending.
A surplus is forecast because tax revenue is picking up and the Government is continuing to restrict growth in expenses. Core Crown expenses are forecast to drop below 31 per cent of GDP in 2014/15 - down from 35 per cent of GDP just two years ago - and then remain well under that level.
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.
Budget forecasts also show net core Crown debt peaking at 28.7 per cent of GDP in 2014/15 and declining thereafter. Longer-term projections show net debt dropping to 17.6 per cent of GDP by 2020/21, in line with the Government's target.
This is a remarkable turnaround in the books. Projections in 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.
But I would remind everyone that forecasts and projections are, by definition, about the future. While the fiscal outlook has improved markedly over the last few years, a lot of work is needed to make the forecasts a reality, particularly when it comes to reducing 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. And, as a percentage of New Zealand's GDP, our level of debt is still well below most of the countries we typically compare ourselves with.
But, in dollar terms, net government debt is still rising by around $130 million a week and is expected to reach $70 billion in 2016/17, which is the equivalent of around $15,000 for each and every New Zealander.
As households around the country know, carrying substantial debt is neither comfortable nor financially prudent. Annual interest payments on our debt will this year cost about as much as 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.
So the Government is firmly focused on capping, then reducing, its debt.
And, alongside debt reduction, future surpluses will also give us more choices. These choices will include, for example, investing in public services, reducing costs on businesses, and helping families get ahead.
Mr Speaker,
Three key changes have been made to the Government's fiscal parameters.
First, the operating allowances for new spending have been slightly adjusted.
The operating allowance is $900 million in Budget 2013, compared with the $800 million signalled in the most recent Budget Policy Statement, and will be $1 billion in Budget 2014, compared with $1.2 billion in the BPS. From 2015 onwards, operating allowances will grow by 2 per cent per Budget.
This change to future allowances will mean bigger surpluses and a greater ability to pay down debt.
In addition, new capital spending in this and the next three Budgets will continue to be funded from the Crown's balance sheet, including from the proceeds of the Government's share offer programme.
Second, the Government intends to delay contributions to the New Zealand Superannuation Fund until the long-term debt target is reached - that is, until net debt is no higher than 20 per cent of GDP.
This means Super Fund contributions are now expected to resume in 2020/21. This is two years later than was projected in the most recent Half Year Update, but is the same time as was expected when contributions were initially suspended in Budget 2009.
I want to stress that this change in no way affects New Zealanders' entitlement to New Zealand Superannuation, either now or in the future.
The choice for the Government is whether to use future cash surpluses to reduce debt to more prudent levels, or whether to put money into world sharemarkets while holding higher debt. The first option is clearly more responsible.
Third, and finally, the Government is now satisfied there is scope for significant reductions in ACC levies.
I will outline these proposed changes in a moment. The impact on the Government's books, however, is to reduce total Crown revenue, and therefore the total Crown operating balance. This has already been built into the Budget forecasts.
