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New Zealand Economic and Financial Overview 2012

Fiscal Policy

Prudent Fiscal Management

In 1994, the Government enacted the Fiscal Responsibility Act. The Act was intended to assist in achieving consistent good quality fiscal management over time. Good quality fiscal management should enable the Government to make a major contribution to the economic health of the country and be better positioned to provide a range of services on a sustained basis. This Act has now been repealed but its provisions have largely been incorporated into Part 2 of the Public Finance Act 1989.

Part 2 requires the Crown's financial reporting to be in accordance with New Zealand Generally Accepted Accounting Practice. The primary fiscal indicators are the operating balance, debt and net worth.

Part 2 requires the Government to pursue its policy objectives in accordance with the principles of responsible fiscal management set out in the Act. These include:

  • reducing debt to prudent levels to provide a buffer against future adverse events;
  • maintaining prudent debt levels by ensuring that, on average, total operating expenses do not exceed total operating revenues ie, the Government is to live within its means over time, with some scope for flexibility through the business cycle;
  • achieving and maintaining levels of net worth to provide a buffer against adverse events;
  • managing the risks facing the Crown; and
  • pursuing policies that are consistent with a reasonable degree of predictability about the level and stability of future tax rates.

Key Fiscal Indicators

An extended period of growth led to a strong fiscal position for the government in the 2007/08 year. However, the recession that began in the first quarter of 2008 resulted in a decrease in revenues and expenditure increases which weakened the fiscal position in 2008/09 and subsequent years.

Operating balance: Following a prolonged period of fiscal deficits, New Zealand achieved surpluses in 1993/94 and remained in surplus until 2007/08. In 2010/11, the operating balance was a deficit of $13.36 billion. The October 2011 Pre-election Economic and Fiscal Update forecasts for the operating balance for 2011/12, 2012/13, 2013/14, 2014/15 and 2015/16 are for deficits of $12.6 billion and $2.4 billion, and surpluses of $1.6 billion $4.0 and $5.7 billion respectively.

Core Crown operating expenses as a percentage of GDP increased to 35.2% in 2010/11, up from 33.8% in 2009/10. Expenses are controlled through output budgeting, accrual reporting and decentralised cost management.

Net debt: Net debt increased to 20.0% of GDP in 2010/2011 as a result of the additional borrowing undertaken to offset the government's operating deficits.

Net worth: After a prolonged period of increases, net worth has been decreasing since 2007/08 and stood at $80.9 billion as at 30 June 2011. The decreases have arisen as a result of the operating deficits, partly offset by asset revaluations.

Fiscal Objectives

The government revised the long-term fiscal objectives in the 2009 Fiscal Strategy Report published with the 2009 Budget. The Fiscal Strategy Report also re-specified the long-term debt objective in "net debt" terms. Net debt is seen as providing a more complete guide to the fiscal constraint because it is determined by the level of gross debt and financial assets. The net debt indicator is less affected by operational issues that have affected the interpretation of gross debt (eg, increases in the amount of settlement cash deposited with the Reserve Bank for monetary policy purposes). Nonetheless, the definition of net debt adopted in the Fiscal Strategy Report differs from that previously reported in that it no longer includes advances (eg, student loans) as a financial asset.

The revised long-term debt objective allows an increase in debt over the short to medium term in response to the economic and financial crisis. However, the government recognises that this increase needs to eventually be reversed, and so the objective requires net debt to remain consistently below 40% of GDP, and brought back to around 30% of GDP no later than the early 2020s. Over the longer term, the government considers that it is prudent, given the nature of economic shocks faced by New Zealand, to have net debt closer to 20% of GDP.

The revised long-term objective for the operating balance aims for a return to an operating surplus sufficient to meet the government's net capital requirements, including contributions to the New Zealand Superannuation Fund, and ensure consistency with the debt objective.

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