Our Outcome Performance for 2009/10
The Treasury focuses its efforts on progressing three outcomes: a stable and sustainable macroeconomic environment; improved overall economic performance; and improved State sector performance. These outcomes are aligned with the Government's priorities.
Outcome: A Stable and Sustainable Macroeconomic Environment
The Government is committed to rebalancing the economy towards more sustainable growth than has been recorded in recent years.
The Treasury assists the achievement of this goal by providing accurate and timely fiscal and macroeconomic advice and by maintaining best international practice debt management and Crown financial reporting standards.
Stable and sustainable macroeconomic settings are critical for individuals' and businesses' investment, spending and savings planning and are vital, therefore, to efforts to deliver higher per capita economic growth and higher living standards for New Zealanders.
At the beginning of the 2009/10 financial year, as the world was tentatively emerging from the global financial crisis and New Zealand had just commenced its recovery, the Crown's operating balance was projected to remain in deficit for about a decade. Priority outputs for the Treasury covered under this outcome, therefore, were focused on finding ways to strengthen the Crown's fiscal position and to thereby diminish the extent to which the Crown was adding to national dissaving.
To achieve this result, work progressed in fourbroad areas:
1. Fiscal and Macroeconomic Policy Advice
The global financial crisis, combined with increased baseline spending and tax cuts over the previous few years, meant that in Budget 2009 the Crown's operating balance was projected to be in deficit for about the next 10 years. The Treasury provided advice on how to advance the return to surplus and why that would help to reduce New Zealand's economic and financial vulnerabilities while supporting stronger economic growth in the future.
Other related outputs included:
- Long-term Fiscal Statement
In October 2009, the Treasury published a report entitled Challenges and Choices. This was the second Long-term Fiscal Statement to be prepared since the Public Finance Act 1989 was amended to require the Treasury to report to Parliament at least once every four years with 40-year projections of key fiscal indicators including revenue, expenses, the operating balance and debt. The report outlined several options for keeping the Crown's finances stable and sustainable over the long term.
- Changing the long-term fiscal objective in the Fiscal Strategy Report (FSR)
The Minister of Finance released his 2010 FSR in May 2010, along with the 2010 Budget. The 2010 FSR amended the Government's long-term net debt target by bringing forward the time when net debt would be brought back to below 20% of Gross Domestic Product (GDP) to the early 2020s. The Treasury assisted the Minister to produce the FSR by providing analytical advice and the 2010 FSR projects net core Crown debt to commence a downward trend in about five years' time and to stand below 15% of GDP by 2025.
- The “Fiscal Anchor”
The Treasury provided advice on the benefits of setting numerical objectives for fiscal measures other than net debt, such as net worth. While net debt has been maintained as the primary fiscal anchor, Ministers also consider movements in other fiscal measures (eg, net worth, operating balance) when weighing-up policy options.
- Best practice approaches to managing Crown spending
The Minister of Finance asked the Treasury to advise on the potential benefits of adopting a cap on total spending and whether or not such a cap would help the Government to meet its fiscal objectives by complementing its annual net new operating allowance. The Treasury devised a potential spending cap proposal and advised the Minister on its costs and benefits within the context of a critical assessment of the evolution and performance of New Zealand's fiscal framework. This work is informing the Treasury's ongoing advice to the Government on best practice approaches to managing Crown spending.
2. Fiscal Management
The Treasury assists the Government by managing the annual budget process and advising on expenditure and revenue decisions that contribute to the Government's fiscal objectives, its economic and other priorities (including its commitment to achieving value for money from expenditure) while raising public sector productivity levels.
For Budget 2010, the Government's fiscal strategy committed it to deliver from within operating and capital allowances of up to a maximum of $1.1 billion and $1.45 billion respectively. These allowances were considerably smaller than the budget allowances during much of the past decade.
The process was modified to enable the Government to deliver its budget from within the stated allowances while advancing its policy priorities. The main changes were:
- at an early stage of the budget process, allocating almost all of the available operating allowance to the Government’s priorities, and
- inviting Vote Ministers to better utilise baseline funding to provide resources to higher-priority applications.
This helped the Government to meet its fiscal objectives with the beneficial economic side-effect of providing efficiency gains, reducing the number of budget initiatives from over 700 in Budget 2008 and Budget 2007 to around 30.
The reduction in the number of budget bids is evidence that departments are looking for savings within their baselines. The Treasury assists the Government to raise the value for money from expenditure by assisting departments to focus on their baseline spending. With budget allowances set to tighten further, this work will take on still greater significance as departments will need to find further savings from within their baselines.
3. Economic Forecasting, Tax Forecasting and Fiscal Reporting
The Treasury produced forecasts for the economic and fiscal outlook in December 2009 and in May 2010. Budget Ministers used these forecasts as key inputs to their decision-making, especially for Budget 2010. The Treasury also provided Ministers with alternative economic and fiscal scenarios around various economic and policy options to assist them to make evidence-based decisions.
The variance from forecast for the one-year-ahead 2009 Budget tax revenue forecast was -1.4%, which was within the target variance of less than ±3%. Forecast variances for the major economic aggregates forecast by the Treasury (eg, real and nominal GDP growth, Consumer Price Index (CPI) inflation), were generally smaller than the rolling, five-year averages (as at March 2010).
The Treasury published the Financial Statements of the Government of New Zealand for the year ended June 2009, the Financial Statements for the three months ended September 2009 and then published monthly statements every month from September 2009 onwards, as planned. Publishing accounts informs the Government on how it is progressing towards its fiscal objectives, provides a base for its forecasts and informs the public on the Crown's income and spending.
The Treasury sent weekly and monthly commentaries on local and international economic developments to Budget Ministers, and provided Ministers with one-off evaluations of major international economic developments.
4. Debt Management
The operations of NZDMO aim to work towards a stable and sustainable macroeconomic environment by minimising the cost of borrowing, and by managing financial assets to maximise long-term returns, within an appropriate risk management framework.
The annual cost of new borrowing in 2009/10 was 4.15%, lower than the long-run average cost of just over 6%. This reflects continued strong demand for New Zealand government securities and relatively low domestic interest rates during the period.
In 2009/10, NZDMO continued its policy of prefunding, revising the target for its 2009/10 bond programme up twice from NZ$8.5 billion to NZ$12.5 billion. Prefunding is expected to save money for New Zealand taxpayers, as sovereign borrowing costs are expected to increase in the future as a result of the significant volume of global sovereign debt needing to be raised. There is also likely to be further pressure on borrowing costs arising from the current focus on some European governments' credit risk.
Throughout 2009/10, NZDMO introduced further measures aimed at increasing demand, and thus reducing the cost of the Crown's borrowing, including:
- the bond tranche size was increased from $6 billion to $8 billion
- reintroducing the one-year treasury bill, providing investors with an additional short-term government security and increasing the range of funding options available to NZDMO, and
- announcing two initiatives under active consideration: reintroduction of inflation-indexed debt, and participation by NZDMO in the secondary market for New Zealand government securities.
Further information on NZDMO's operations can be found on pages 115 to 126 of this report.
