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Economic Overview (continued)

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.

Key Fiscal Indicators

An extended period of growth had 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: In 2013/14, the operating balance before gains and losses (OBEGAL) was a deficit of $2.9 billion (1.3% of GDP). However, when gains and losses are included, the operating balance was a surplus of $2.8 billion (1.2% of GDP). The December 2014 Half-Year Economic and Fiscal Update forecasts for the OBEGAL for 2014/15, 2015/16, 2016/17, 2017/18, and 2018/19 are for a deficit of $0.6% billion (0.2% of GDP) and surpluses of $0.6 billion (0.2%), $2.6 billion (1.0%), $3.1 billion (1.1%) and $4.1 billion (1.4%) respectively.

Core Crown operating expenses as a percentage of GDP fell to 30.5% in 2013/14 from 32.4% in 2012/13. Expenses are controlled through output budgeting, accrual reporting and decentralised cost management.

Net debt: Net debt was broadly steady at 25.6% of GDP in 2013/14 as strong nominal growth offset additional borrowing undertaken by the Government to cover its cash deficit.

Net worth: After a prolonged period of deficits, net worth attributable to the Crown rose in 2012/13 and 2013/14 to $68.1 billion and $75.6 billion respectively, reflecting the operating surplus coupled with positive property revaluations.

Fiscal Objectives

The Government's long-term fiscal objectives were set out in the Fiscal Strategy Report published with the 2014 Budget and re-confirmed in the 2015 Budget Policy Statement in December 2014. 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 be brought back to no higher than 20% of GDP by 2020 and to remain between 10% and 20% thereafter. 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, and ensure consistency with the debt objective.

The current short-term fiscal intention is for the OBEGAL to return to surplus in 2014/15, subject to any significant shocks.

Public Debt

Prior to March 1985, successive governments had borrowed under a fixed exchange-rate regime to finance the balance of payments deficit. Since the adoption of a freely floating exchange-rate regime, governments have undertaken new external borrowing only to rebuild the nation's external reserves and to meet refinancing needs.

Direct public debt increased by a net amount of $5 million including swaps between 1 July 2013 and 30 June 2014. This increase was due to a net increase in internal debt of $4,599 million and an increase of $880 million in external debt.

Government gross direct debt amounted to 33.2% of GDP in the year ended June 2014, unchanged from 33.2% the previous year.

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