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Budget 2016 Home Page Fiscal Strategy Report - Budget 2016

The Government's Fiscal Priorities

The Government's long-term fiscal objectives are to have net government debt between 0 per cent and 20 per cent of GDP, core Crown expenses below 30 per cent of GDP and operating balances sufficient to meet net capital requirements, including NZS Fund contributions.

Delivering on the debt objective will put New Zealand in a good position to cope with economic shocks and natural disasters, maintain credibility with international lenders and reduce the fiscal burden on future generations. The objective for core Crown expenses ensures government spending is kept to a moderate level, doesn't place excessive demands on taxpayers and allows other sectors of the economy to grow.

Consistent with the long-term objectives, the Government's shorter-term fiscal priorities are:

  • maintaining rising OBEGAL surpluses over the forecast period so that cash surpluses are generated and net debt begins to reduce in dollar terms
  • reducing net debt to around 20 per cent of GDP in 2020
  • if economic and fiscal conditions allow, beginning to reduce income taxes, and
  • using any further fiscal headroom - including from positive revenue surprises - to reduce net debt faster.

Another priority mentioned in the Budget Policy Statement was to implement a new funding policy for the Accident Compensation Corporation (ACC). This policy has now been confirmed, and will inform ACC's levy consultation later this year. These policy changes follow a period of ACC levy reductions and after 1 July 2016 employers, workers and motor vehicle owners in total will be paying close to $2 billion less in ACC levies than they were five years ago.

Operating allowances have been rearranged since the Budget Policy Statement (Table 2).

Table 2 - Operating allowances
$billions Budget 2016 Budget 2017 Budget 2018 Budget 2019 Budget 2020
Operating allowances Half Year Update 1.0 2.5 1.5 1.5 1.6
Operating allowances Budget Update 1.6 1.5 1.5 1.5 1.5

Source: The Treasury

A portion of spending previously earmarked for Budget 2017 has been brought forward into Budget 2016, in part to recognise that higher-than-expected population growth is putting pressure on health, education and other budgets. The increased Budget 2016 allowance also provides funding for key public services such as health and child protection, and investment in productivity-enhancing initiatives in areas such as tax and innovation.

Another portion of spending previously earmarked for Budget 2017 has been used to reduce net debt to help reach the 2020 debt target.

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

The operating allowances remain well below those adopted in the mid-2000s (Figure 5).

New capital spending for Budget 2016 has been set at $1.4 billion, slightly lower than anticipated in the Budget Policy Statement. However, in addition, significant new capital spending will be funded from reprioritising capital within the Crown's balance sheet. As a result, total new spending on capital in this year's Budget is one of the largest new investment in the past 10 years, at $2.6 billion. This new investment is focused on core public infrastructure such as schools and transport.

For subsequent Budgets in the forecast period, the capital allowance will be set at $900 million.

These changes to the allowances will reduce spending by around $1.2 billion over the next five years, helping to further reduce debt and meet the Government’s net debt targets.

A key part of the Government's fiscal strategy is managing pressures through reducing demand and better management of capital. This requires the connection of active risk management with future forecasts and projections.

When it is affordable, and when economic conditions permit, the Government would like to lower income taxes with a focus on lower and middle income earners who have faced fiscal drag as their incomes continue to rise. However, reducing debt is currently a higher priority than reducing revenue. The Government is also cautious given the wide band of uncertainty around economic and fiscal forecasts. The new operating allowances mean there isn’t an explicit provision for tax cuts in the forecasts, but the Government will continue to consider options around lowering tax rates or thresholds – either in Budget 2017 or after – if the fiscal situation improves further.

Budget 2016 forecasts are consistent with the Government's short-term intentions. Operating surpluses are expected to rise, cash surpluses are forecast from 2018/19 and net debt is projected to be 19.3 per cent of GDP in 2020/21. Core Crown expenses fall to 29.7 per cent of GDP this year and stay under 30 per cent thereafter.

Forecasts, however, are uncertain and are revised every six months. The Government's fiscal strategy takes a medium-term approach to economic and fiscal management, looking through temporary ups and downs and focusing on the overall path of the Crown's finances.

The impact of discretionary fiscal policy is expected to be broadly neutral on average over the forecast period. While the Government does not actively use fiscal policy as a stabilisation tool, it does take into account the impact of fiscal policy decisions on monetary policy.

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

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