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2014 Investment Statement

Importance of the balance sheet in meeting government objectives

Effective management of the balance sheet has a key role to play in supporting governments to meet their objectives. A well-managed balance sheet is one which both supports the provision of state-funded services while also underpinning the overall economy's performance, and contributes to increasing living standards.[4]

The state sector and government policy

Governments act on behalf of all New Zealanders to deliver services as efficiently and effectively as possible. Effective balance sheet management supports this objective by minimising the cost and maximising the benefits of holding assets and liabilities. The importance of providing value for money is discussed further in Box 2.2.

Effective management of the balance sheet allows the government to achieve an equitable distribution of benefits, costs and risks across current and future generations. Debt allows the cost of investments to be spread over their useful lives meaning that those that benefit contribute to the cost. Saving through the balance sheet also allows for the cost of future expenses to be met by those who benefit from them.

Box 2.2 - The importance of value for money

Crown assets come with an ongoing cost. Based on the public sector discount rate the opportunity cost of Crown asset ownership is around $25 billion per annum. This does not include the costs of utilisation, or upkeep. Capital is not free. Capital that does not provide benefits greater than the costs of ownership incurs costs on citizens.

To put the Crown's balance sheet size into context, there were approximately 4.5 million people living in New Zealand at the end of the last financial year. That means the Crown owned about $54,000 worth of assets and owed $39,000 in debt on behalf of every New Zealander at that time. That means many families' indirect share of the Crown's assets and liabilities would typically be second only in value behind the family house and mortgage.

People expect governments to make the best use of these assets and to manage liabilities to minimise costs. Achieving this allows for more and better public services - more schools or better healthcare for example - or lower taxes, which increases incomes.

Economic growth

An efficiently managed balance sheet saves taxpayer dollars. It also supports a productive public sector and reduces the chances of public spending reducing private sector activity. Productivity is critical to economic growth, increasing national wealth and living standards. With the Crown contributing approximately one fifth of New Zealand's national output each year, even a small improvement in public sector productivity would have a significant positive effect on the wider economy.[5]

A stable economic environment is one of the basic requirements for strong economic performance. Managing public finances well has clear links to this goal. A strong and well managed balance sheet supports fiscal policy by allowing the effects of economic cycles to be met without the need for destabilising tax or expenditure changes. At a minimum, operating revenues should equal operating expenditure over the economic cycle, with debt being used only to fund investment.

Governments with a strong balance sheet have more flexibility to manage the investment cycle in alignment with the wider economic cycle. For example, a number of infrastructure projects were brought forward supporting economic growth during the recent economic slowdown as a result of the global financial crisis. On the other hand, too much stimulus as the economy reaches capacity could push up interest rates, put upward pressure on the exchange rate and increases pressure on the tradable sector.

A strong balance sheet supports a favourable credit rating and lowers the cost of capital for government and domestic borrowers, which helps support increased productive investment. Even after the effects of the global financial crisis and the Canterbury earthquakes, both of which resulted in an increase in Crown debt, New Zealand's credit rating remains strong and it is one of the highest rated sovereigns in the world (see Figure 2.2).

A strong Crown balance sheet can also help manage the effects of shocks that may otherwise have a major destabilising effect on a country. It also allows for the sharing of consequences among individuals and across generations that would otherwise fall unevenly.

Figure 2.2 - Foreign currency sovereign credit ratings
Figure 2.2 - Foreign currency sovereign credit ratings   .
Source:  The Treasury

Imbalances and structural problems in the economy can be assisted by balance sheet management. For example, New Zealand has a relatively high net external debt position, primarily reflecting that the private sector, including households, on average spend more than they earn. Also, New Zealand's sources of foreign earnings are relatively narrow, mainly from commodity based exports. These factors make the economy susceptible to any abrupt changes in demand or in perceptions about economic resilience. Governments' fiscal policy settings have generally been set to offset high private sector borrowing in recognition of these risks.

Notes

  • [4]http://www.treasury.govt.nz/abouttreasury/higherlivingstandards
  • [5]This represents central government's operating and capital output, but excludes Crown expenses such as transfers, depreciation and debt servicing.
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