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Budget 2015 Home Page Fiscal Strategy Report - Budget 2015

The Government's Fiscal Priorities

There is no change in the Government's five fiscal priorities set out in the Budget Policy Statement in December 2014.

1 Returning to surplus this year and maintaining surpluses in the future

2 Reducing net government debt to 20 per cent of GDP by 2020, including repaying debt in dollar terms in 2017/18

3 Further reducing Accident Compensation Corporation (ACC) levies on households and businesses

4 Beginning to reduce income taxes from 2017 with a focus on low and middle-income earners, and

5 Using any further fiscal headroom – including from positive revenue surprises – to get debt down to 20 per cent of GDP sooner than 2020.

The Government is making good progress on all these fiscal priorities.

The Government's fiscal strategy has been to focus strongly on spending control. Core Crown expenses in the current year, for example, are expected to be $4 billion lower than was forecast in Budget 2011.

Figure 4 - OBEGAL in BEFU 2014 and 2015
Figure 4 - OBEGAL in BEFU 2014 and 2015   .
Source: The Treasury

However, tax revenue is not rising as quickly as expected and this is lowering operating balances across the forecast period, compared to Budget 2014 predictions (Figure 4).

A deficit of $684 million is now forecast for 2014/15, a $2.2 billion improvement on the 2013/14 deficit. The final balance, however, will not be known until the year-end financial statements are published in October.

A surplus of $176 million is expected in 2015/16, followed by $1.5 billion in 2016/17.

Although a deficit is now expected in 2014/15, the overall trajectory has not changed. Sustained expenditure control has moved the Government's books from an $18.4 billion deficit four years ago to steadily rising surpluses from 2015/16.

Debt rises a bit further in dollar terms until 2017/18, after which there will be sufficient cash surpluses to start repaying debt. Net debt is projected to reach 19.7 per cent of GDP in 2020/21, in line with the Government’s key long-term fiscal objective.

The Government does not intend to make cuts to services, programmes or income support simply to chase a surplus. The factors that have reduced Government revenue - low inflation and low interest rates - are good for most households and businesses, and the overall fiscal position remains very positive.

New Zealand will remain one of the first countries in the developed world to return to a budget surplus after the global financial crisis.

There is consequently no change to the operating allowances set out in the Budget Policy Statement. Budgets 2015 and 2016 have operating allowances of $1 billion, before increasing to $2.5 billion in Budget 2017. A higher Budget operating allowance in 2017 provides options around future income tax reductions should fiscal and economic conditions allow.

The operating allowance for Budget 2018 has been set at $1.5 billion, rising thereafter at 2 per cent per Budget.

Figure 5 - New operating allowances in each Budget (final-year impact)
Figure 5 - New operating allowances in each Budget (final-year impact)   .
Source: The Treasury

These allowances remain well below the new discretionary operating allowances adopted in the mid-2000s (Figure 5), and core Crown expenses will continue to fall each year as a proportion of GDP.

In addition to the operating allowance, the forecasts also include an indicative sum for ACC levy reductions of $375 million in 2016 and a further $120 million in 2017 (levy years).

Final decisions on ACC levies will be made by Cabinet after public consultation. Any levy cuts in 2016 and 2017 will come on top of previous reductions that together have totalled close to $1.5 billion since 2011/12.

In this Budget, and Budget 2016, new capital spending will be funded from reprioritisation, in particular by drawing on proceeds from the Government share offers through the FIF.

To date, proceeds from the Government Share Offer Programme have allowed investments of over $600 million each in health and education and nearly $1 billion in transport, out of a total spend of $3.9 billion.

The fiscal forecasts set aside up to $3.7 billion in capital allowances to fund priority new capital projects in the four Budgets from 2017. However, the Government will look to finance some of this new spending through better managing existing capital, reducing the funds required to finance new capital expenditure in those future years.

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

Box 1: Changes to the OBEGAL surplus over time

Treasury has revised down its forecasts of the OBEGAL since Budget 2014 by $1.1 billion in both 2014/15 and 2015/16. The OBEGAL represents the difference between revenue and expenses – both of which are over $94 billion. Modest movements in revenue and expense forecasts can therefore move the OBEGAL forecast significantly.

While lower inflation forecasts may reduce both tax revenue and benefit forecasts, the impact on OBEGAL is not symmetrical because inflation-sensitive tax revenues (roughly $66 billion in 2015) are nearly ten times larger than directly inflation-sensitive expenses (largely benefits indexed to CPI inflation at $8 billion in 2015).

Valuations of the Crown’s assets and liabilities (for example, the re-estimation of insurance claims costs or revaluation of student loans) and factors unrelated to the economic environment (for example, the timing of Treaty of Waitangi settlements) can also influence the results in the near term. The operating results of Crown entities and state-owned enterprises can also have a significant impact on OBEGAL. For example, increased insurance expenses in ACC will have a direct impact on OBEGAL.

The factors explaining the downward revision to the OBEGAL forecast differ in each of the next two years (Figure 6). In 2014/15, around half the fall is attributable to the reduced tax revenue, while the other half is due to other factors such as increased claims costs associated with the Canterbury rebuild. This contrasts with 2015/16 where the expected fall in tax revenue is much larger, but other factors have a positive impact on OBEGAL, particularly the re-phasing of operating allowances since Budget 2014 to align with the Government's fiscal priorities. The majority of interest-bearing financial assets are short-term in nature, which means lower interest rates result in a decrease in interest income earlier than a decrease in finance costs.

Figure 6 - Changes in OBEGAL forecasts since BEFU 2014
Figure 6 - Changes in OBEGAL forecasts since BEFU 2014   .
Source: The Treasury
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