4.3  Fiscal situation

4.3.1  Issue

New Zealand ran fiscal surpluses for about 15 years from 1994 to 2008. These surpluses strengthened the government balance sheet allowing net debt to fall from 1993, and net worth to rise through the period. This helped counter the growing private sector domestic and external indebtedness.

The government's operating balance went into structural deficit[9] in 2009 and is projected to remain in deficit until around 2015. The government is spending more than it is receiving in revenue and net public debt is projected to rise from 14% of GDP in 2010 to around 28% by 2015 and then fall back to 10% in 2025.[10]

4.3.2  The move to structural deficit

Figure 4.7: Fiscal surpluses from 1994 to 2008 parallel the period of strong government saving

Source:  Statistics New Zealand; Treasury

Through the past decade the government and its advisers thought that increases in revenue each year signified a structural surplus (i.e., a positive fiscal balance on average over the economic cycle). Hence money was available that could be spent or returned to taxpayers as tax cuts. This indeed happened – spending ratcheted up and then taxes were cut in 2008 and 2009. But the “structural” assumption was wrong and when GDP growth slowed with the recession and the GFC, revenue fell from a decade peak of 34.5% of GDP in 2006 to 32.2% in 2009.

Figure 4.8: Core crown revenue trended up as a share of GDP from 2000 to 2008, dragging up core spending

Source:  The Treasury

Core Crown expenses increased from 28.9% of GDP in 2004 to 34.7% of GDP in 2009, a rise of 5.8 percentage points over five years. About 3.5 percentage points of the increase occurred between 2008 and 2009. Part of this rise was cyclical as the 2008/09 recession drove up unemployment expenses and slowed the growth of nominal GDP, but this probably accounted for only about 1 percentage point of the rise.

Figure 4.9: Government operating balance went into structural deficit in 2009 with a return to surplus forecast only in 2015

Source:  The Treasury, Half-Year Economic and Fiscal Update 2010

Policy decisions were the main driver in the rise of expenses as a share of GDP over the past decade. In 2008, New Zealand's approach to fiscal stimulus in the face of the GFC differed from most other OECD countries. Other countries' stimulus packages were temporary responses to the crisis, whereas most of New Zealand's fiscal stimulus was structural, making it more difficult to unwind. Figure 4.9 shows the fiscal deterioration is largely structural with the automatic fiscal stabilisers playing a relatively minor role.

New Zealand's public debt levels are relatively low by OECD standards, but the size of the recent fall in the country's structural fiscal balance is at the larger end of the OECD. Figure 4.10 incorporates the Half Year Update 2010 figures for New Zealand which show a general government structural fiscal deficit of 3.7% in 2011, making the change in the structural balance from 2007 to 2011 a substantial 6.4 percentage points.

While government debt is currently low by international standards, this will not remain the case on current forecasts. A structural deficit of around 5% of GDP in 2011 means there is little headroom before harmful debt dynamics start to set in, and a projected structural fiscal deficit of 6% in 2012 is exceeded only by Ireland, the United States, the United Kingdom, Japan and Poland.

Figure 4.10: New Zealand's change in structural balance is the large end of the OECD

Source:  OECD; The Treasury