The marked fiscal turnaround over the past five years reflects both the recovering economy and ongoing, considered restraint in government spending.
The Government's focus has been on improving public sector productivity, achieving results and getting on top of the longer-term drivers of spending. It has managed to drive substantial improvements to public services in part because of, rather than in spite of, tight financial constraints.
None of the forecast revisions in the Half Year Update change the Government's overall fiscal strategy - keeping a tight rein on spending, focusing on results from public services, starting to pay down debt and looking to return any excess revenue on top of this to taxpayers.
It is also important to recognise the uncertainty around economic and fiscal forecasts, which will continue to move around (Figure 5). It is the overall path of the Crown's finances that is important. This means taking a medium-term approach to economic and fiscal management, looking through temporary ups and downs, and providing some certainty and predictability to taxpayers, businesses and recipients of public services.
- Figure 5 - Core Crown tax revenue uncertainty
- Source: The Treasury
With the operating balance (before gains and losses) now broadly in balance, in the immediate future the Government will not distinguish between forecasts of small negative and small positive balances. In particular, the Government will not sharply reduce operating allowances in response to a forecast weakening in the tax take, as this would risk exacerbating the expected weakness in the economy in the near term.
While the fiscal strategy remains unchanged, the Government has updated some of its short-term intentions and long-term objectives, including those required by the Public Finance Act 1989, given that some are now out of date and others need adjusting to reflect the near-term changes in the economic outlook.
The Government's fiscal priorities have therefore been amended since the Fiscal Strategy Report2015. Overall, the focus on the medium term remains the same, but the changes provide scope for the fiscal position to fluctuate in response to changing economic circumstances. Within the current economic and fiscal outlook, the fiscal priorities are:
- maintaining rising operating surpluses (before gains and losses) over the forecast period so that cash surpluses are generated and net government debt begins to reduce in dollar terms
- reducing net government debt to around 20 per cent of GDP in 2020 and, in the medium term, reducing net debt to within a range of 0 per cent to 20 per cent of GDP
- implementing a new funding policy for the Accident Compensation Corporation (ACC), following previous levy reductions
- if economic and fiscal conditions allow, beginning to reduce income taxes from Budget 2017, and
- using any further fiscal headroom – including from positive revenue surprises – to reduce net debt faster.
A formal statement of the Government's short-term intentions and long-term objectives can be found in the Annex.
-  Figure 5 plots the Half Year Update tax revenue forecast, along with confidence intervals around these forecasts based on the Treasury's historical tax forecast variances and the assumption of an even balance of risks around the central forecast. The outermost shaded area captures the range ±$7.2 billion in the June 2020 year, within which actual tax outturns are expected to fall 80 per cent of the time.