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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. The provisions of the Fiscal Responsibility Act have since largely been incorporated into Part 2 of the Public Finance Act 1989.

Part 2 requires the Government to pursue its policy objectives in accordance with the principles of responsible fiscal management. In 2013, the Government enacted the Public Finance (Fiscal Responsibility) Act 2013, which amended one of the principals of fiscal responsibility and added three new principles.

The principles of responsible fiscal management are:

  • 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 i.e., 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;
  • when formulating tax policy, have regard to efficiency and fairness, including the predictability of tax rates;
  • when formulating fiscal policy, have regard to the interaction between fiscal policy and monetary policy;
  • when formulating fiscal policy, have regard to its likely impact on present and future generations; and
  • ensuring the Crown's resources are managed effectively and efficiently.

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 2012/13, the operating balance before gains and losses was a deficit of $4.4 billion. However, when gains and losses are included, the operating balance was a surplus of $6.9 billion. The December 2013 Half-Year Economic and Fiscal Update forecasts for the operating balance before gains and losses for 2013/14, 2014/15, 2015/16, 2016/17 and 2017/18 are for a deficit of $2.3 billion and surpluses of $0.1 billion, $1.7 billion, $3.1 billion and $5.6 billion respectively.

Core Crown operating expenses as a percentage of GDP remained steady at 33.1% in 2012/13. Expenses are controlled through output budgeting, accrual reporting and decentralised cost management.

Net debt: Net debt increased to 26.3% of GDP in 2012/2013 as a result of the additional borrowing undertaken to offset the Government's operating deficits.

Net worth: After a prolonged period of deficits, net worth attributable to the Crown rose in 2012/2013 to $68.1 billion, reflecting the operating surplus coupled with positive property revaluations.

Fiscal Objectives

The Government's long-term fiscal objectives were set out in the 2013 Fiscal Strategy Report published with the 2013 Budget and re-confirmed in the 2014 Budget Policy Statement in December 2013. The long-term fiscal objectives include objectives for debt, the operating balance, operating expenses and revenue, and net worth.

The long-term debt objective requires net debt to remain consistently below 35% of GDP and to be brought back to no higher than 20% of GDP by 2020. Consistent with this, the objective for the operating balance is to return to an operating surplus sufficient to meet the Government's net capital requirement, including contributions to the Government Superannuation Fund.

The current short-term fiscal intention is for the operating balance excluding gains and losses to be returned to surplus as soon as possible and no later than 2014/15, subject to any significant shocks.

Current forecasts are for net core Crown debt to peak at 28.7% of GDP in 2015/16.

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