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Chapter 7: Fiscal Sustainability and Liability Management

...The ability of the Crown to remain solvent over time within predicable tax and spending parameters is integral to all of the dimensions that underpin living standards.  This requires careful management of both debt and non-debt liabilities...

  • Chapter summary
  • Understanding balance sheet sustainability
  • Balance sheet buffers
  • Debt composition
  • Managing non-debt liabilities
  • Future developments

Chapter summary

Over the economic cycle, operating revenue should be sufficient to at least cover operating expenses, meaning that in the long term, borrowing is mainly used to fund asset acquisition. Sustainability requires fiscal buffers to be sufficient to manage both the effects of economic cycles and shocks. The composition of the fiscal buffer can reflect some combination of borrowing capacity and reserve assets.

The current Government has a long-term fiscal objective of reducing net core Crown debt to no higher than 20% of GDP by 2020, which reflects a prudent level of debt. This debt target is lower than in many other OECD countries because New Zealand faces vulnerability because of its relatively high levels of private offshore debt and its narrow commodity export base.

The Crown also has many non-debt liabilities that require careful management. Saving now to meet these obligations reduces the resources available for spending today, but will reduce future fiscal pressures. This approach has the potential benefit of better aligning the costs of an obligation to those who benefit from them.

A key focus should be to rebuild the fiscal buffer following the effects of the global financial crisis and Canterbury earthquakes. Reducing net core Crown debt to a prudent level should be a priority and would go some way to rebuilding the fiscal buffers. Following that, there is scope to continue to increase resiliency of the Crown balance sheet by further reducing debt, financing other non-debt liabilities, building reserves, or a combination of these approaches. If managed well, this process can support macroeconomic stability and growth objectives.

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