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Budget 2015 Home Page Fiscal Strategy Report - Budget 2015

Fiscal Forecasts and Projections

For Budget 2015, fiscal forecasts have been prepared for the period 2014/15 to 2018/19 and longer-term projections have been prepared out to 2028/29.

These show revenue increasing as the economy grows (Figure 7), albeit at a slightly slower pace than was previously forecast.

Figure 7 - Core Crown revenue and expenses
Figure 7 - Core Crown revenue and expenses   .
Source: The Treasury

Core Crown expenses are forecast to rise in dollar terms (Figure 8), but fall as a share of GDP. In total, core Crown expenses have fallen from 34.1 per cent of GDP in 2008/09 to an expected 30.0 per cent in 2015/16, and are expected to continue to fall.

Figure 8 - Core Crown expenses
Figure 8 - Core Crown expenses   .
Source: The Treasury

Note: Future increases in functional spending will be allocated from the forecast for new operating allowances.

These revenue and expense tracks translate into a growing operating surplus from 2015/16 onwards. The OBEGAL surplus is forecast to grow to $3.6 billion (1.3 per cent of GDP) in 2018/19 (Figure 9).

Figure 9 - Total Crown operating balance (before gains losses)
Figure 9 - Total Crown operating balance (before gains losses)   .
Source: The Treasury

The residual cash balance is forecast to be in surplus in 2018/19, which means the Government will begin to repay net debt in dollar terms. Cash balances are projected to increase over time (Figure 10).

Figure 10 - Core Crown residual cash
Figure 10 - Core Crown residual cash   .
Source: The Treasury

As a percentage of GDP, net debt is forecast to reach a peak of 26.3 per cent in 2015/16 before beginning to fall. Net debt is projected to decline to 19.7 per cent of GDP by 2020/21 (Figure 11).

Figure 11 - Net core Crown debt
Figure 11 - Net core Crown debt   .
Source: The Treasury

Reducing government debt through higher public savings puts New Zealand in a better position to cope with the next economic shock or natural disaster. It helps to raise national savings, maintain credibility with international lenders, reduce finance costs and allow the internationally competitive sectors of the economy to grow.

Contributions to the NZS Fund are projected to resume in 2020/21 when net debt reaches 20 per cent of GDP. Beyond 2020, the Government intends to maintain net debt within a range of around 10 per cent to 20 per cent of GDP. This reflects the fact that debt provides a buffer for economic shocks and will fluctuate over the economic cycle.

These forecasts and projections show a significant turnaround in the Government's books over the past seven years. However, there is a lot of work to be done to make the forecasts and projections a reality.

A key way of managing long-term government expenditure is delivering better public services, and in particular improving results for the most vulnerable in society.

Better data is helping the Government understand the risk factors that indicate whether a young person is likely to require government intervention in the future, such as going on a benefit or going to prison.

For example, certain groups of thirteen-year-olds known to Child, Youth and Family (CYF) services are nine times more likely to be long-term benefit recipients and seven times more likely to have had a Corrections sentence by age 21 (Figure 12).

Figure 12 - Outcomes for groups known to CYF
Figure 12 - Outcomes for groups known to CYF   .
Sources: Integrated Child Dataset, The Treasury

This information helps the Government make better decisions about investing earlier, and in a more targeted way, to help at-risk groups of the population. When this is done well, it can generate long-term fiscal savings.

The Government's focus on delivering better public services is working. More people are coming off welfare and into work, achievement of NCEA Level 2 is increasing, the crime rate is dropping, and a range of other indicators are showing marked improvement.

Looking further into the future, the fiscal challenges associated with population ageing and cost growth are outlined in the Treasury's Long-term Fiscal Statement. The Statement stresses that good fiscal policy in the short to medium term - controlling government spending and getting debt down - is crucial in preparing for an ageing population. Reducing net debt to no higher than 20 per cent of GDP, resuming NZS Fund contributions as planned, and delivering further improvements in public-sector performance will have a significant effect on long-term projections of the Government's fiscal position and reduce the burden on future generations.

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