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Budget policy statement

Budget Policy Statement 2011

The reporting that the Public Finance Act 1989 (PFA) requires of the Minister of Finance consists of two fiscal responsibility documents: the Budget Policy Statement (BPS) (normally released in December) and the Fiscal Strategy Report (FSR) (released alongside the Budget - normally in May). The BPS must state the broad strategic priorities by which the Government will be guided in preparing the forthcoming Budget. The requirements of the BPS are to:

  • state the overarching policy goals that will guide the Government's Budget decisions
  • state how the Budget accords with the Government's short-term fiscal intentions
  • state any changes to the Government's long-term fiscal objectives
  • state any changes to the Government's short-term fiscal intentions, and
  • explain how any changes in long-term fiscal objectives and short-term fiscal intentions accord with the principles of responsible fiscal management.

The Budget Policy Statement (BPS) 2011 was published on 14 December 2010 with the Half Year Economic and Fiscal Update (HYEFU) 2010 and the 2010 Investment Statement of the Government of New Zealand.

Executive Summary

This Government focused its first two Budgets on helping lift the economy out of recession, building a solid base for future growth and getting the medium-term fiscal position under control. Budget 2011 will continue our focus on ensuring balanced and sustainable economic growth, while delivering on our commitment to responsible fiscal management.

Budget 2011 will be delivered against a backdrop of a New Zealand economy that is well down the path of recovery - having recorded five successive quarters of growth. Unemployment peaked in late 2009 and is now falling. Core inflation and short-term interest rates remain low. Our key trading partners are also growing, although that growth is uneven.

New Zealand's economic growth is expected to pick up through 2011 - reflecting higher labour income growth and the terms of trade remaining high. Despite this, there is evidence of households and businesses remaining cautious in their spending and investment decisions as they look to pay off debt and strengthen their financial position.

We want to see an economy where the rate of growth is significantly higher, where that growth is sustainable and where the gains are widely distributed. This Government is doing its part in managing the vulnerabilities the economy faces by allowing room for stronger private sector-led growth and by focusing on our plan for growth and jobs. Budget 2011 will continue to focus on six key policy areas: the tax system; public sector performance; education and skills; science innovation and trade; the regulatory environment; and productive infrastructure. Further tilting the economy towards saving and investment, as we did with the Budget 2010 tax package, will be important for higher growth and creating jobs.

The Government remains committed to rebuilding our fiscal buffer against future shocks. Our objective is to ensure that net debt remains under 40% of Gross Domestic Product (GDP), and is brought back to a level no higher than 20% of GDP by the early 2020s. We will achieve this by prudently managing the Crown's balance sheet, with the first Investment Statement being a step in that direction, and by returning the operating balance, before gains and losses, to surplus as soon as practical, and no later than 2015/16.

Budget 2011 will support this plan by delivering on our commitment to restrain new discretionary initiatives within an operating allowance of $1.12 billion per annum and a capital allowance of $1.39 billion. To support that restraint and help manage underlying pressures, Budget 2011 will see further reprioritisation of spending towards higher value priorities.

Economic and Fiscal Context

When this Government was elected in late 2008 we inherited an economy in recession. This put considerable stress on the fiscal position. Projections showed that public debt, although low in 2008, was set to increase substantially - largely as a result of a decade of projected operating deficits. The Government's key aims in Budget 2009 were to ensure that jobs and economic activity were supported and that the expected ballooning of debt was controlled and then brought back down. In Budget 2010 we focused on tax reform, strengthening the economic recovery, helping families get ahead and maintaining sound public finances. Budget 2011 will continue our focus on ensuring balanced and sustainable economic growth while delivering on our commitment to responsible fiscal management. A key focus will be on reducing our economic imbalances and further building confidence in the economy.

New Zealand's rate of economic growth from the mid-2000s proved to be unsustainable. It was an economic boom that was increasingly fuelled by debt and consumption. Domestic and external imbalances emerged. Although there are important offsetting factors, such as low government debt and a floating exchange rate regime, our net external liabilities increased from 75% of GDP in 2004 to around 85% of GDP in 2010. This increase has been caused by persistent current account deficits, which reflect a shortfall between our level of saving and our level of investment.

Figure 1 - Change in 10-year government bond yields, January 2010 to November 2010
Figure 1 - Change in 10-year government bond yields, January 2010 to November 2010.
Sources: Reuters, the Treasury

These imbalances leave New Zealand exposed to potential adverse changes in investor sentiment. Figure 1 shows the recent change in 10-year government bond yields in Australia, Germany, Greece, Ireland, New Zealand, Portugal, Spain and the United States. It highlights the extra interest cost that countries face when investors begin to lose confidence in a country’s ability to meet its foreign debt obligations. While the level of New Zealand’s net external liabilities is similar to at-risk or distressed countries, the contribution of government debt is much lower. Ireland was in a similar position prior to the global financial crisis. This underlines the need to maintain a strong fiscal position if the confidence of financial markets is to be maintained, as emphasised by the recent decision of Standard and Poor’s to revise its outlook on their foreign currency sovereign credit rating for New Zealand from stable to negative.

Policy settings need to support a shift in the drivers of our economic growth. In Budget 2010 the Government announced a significant, and broadly fiscally-neutral, tax package that was designed to shift incentives towards saving and investment through a change in the tax mix. The first round of the changes was implemented smoothly in October 2010. Further changes announced in Budget 2010 are scheduled for April 2011, including a lower company tax rate.

The issue of saving and investment in New Zealand is currently being investigated by the Savings Working Group, which is due to report back in January 2011. This is an important issue which has an impact on the imbalances in our economy. It is an area where the Government can play a role in creating an environment with better incentives towards saving and investment. Reducing the imbalances New Zealand faces means that although growth may be slower initially than after previous recessions, a more solid foundation will be laid for the future.

Figure 2 - Sectoral credit growth
Figure 2 - Sectoral credit growth.
Source: Reserve Bank of New Zealand

Fiscal policy also plays a key role in supporting economic growth and reducing the imbalances in the economy. We have reprioritised over $4 billion of spending in the last two Budgets, helping us to meet our election commitments and slow the projected rise in debt, and in turn assisting the reduction of imbalances in the economy. We expect to identify further opportunities in Budget 2011 and beyond.

The process of reducing these imbalances has already begun, with households and businesses continuing to be cautious. Household balance sheets had become overstretched during the last economic boom, as households relied heavily on debt to fund their consumption and investment. Figure 2 shows that the household, business and agriculture sectors have all begun to shift away from debt-fuelled consumption and investment, with credit growth slowing or falling across the board.

The current outlook

Annual average real GDP growth is forecast to pick up over the coming year, increasing from 2.2% in the year to March 2011 to 3.4% in the following year. Real GDP growth in the first half of 2010 was more subdued than expected. In addition, growth in the September 2010 quarter is likely to have been held back by the Canterbury earthquake. Despite the impact of the earthquake on New Zealand's asset base, economic growth is expected to lift during 2011 as household and business spending growth picks up, reflecting higher labour income growth and the terms of trade remaining high.

Earthquake rebuilding activity will also boost growth in 2011. Both monetary policy and fiscal policy will continue to provide stimulus. Exports will benefit from robust trading partner growth, especially in Australia and emerging Asia, although the high New Zealand dollar will limit the ability of some exporters to take advantage of this.

While the recovery is expected to strengthen, its overall pace is expected to be more muted than in many past recoveries. The cautious approach of households and businesses is likely to continue for some time yet. The Government is also being cautious with its spending decisions and from 2011/12 the fiscal deficit will start to narrow. Fiscal policy, which has been stimulatory for several years, will be altered to a more neutral position.

Figure 3 - Global imbalances: current account balances in major economies
Figure 3 - Global imbalances: current account balances in major economies.
Source: Organisation for Economic Co-ordination and Development (OECD)

Globally, the economic picture remains fragile and patchy. While China and Australia are currently recording solid growth, the majority of the developed world economy is struggling to recover the output lost during the financial crisis. In many countries, the damage done to financial systems and household and government balance sheets means the global recovery is likely to be more drawn out than we have become accustomed to over the past few decades. As a result, global imbalances remain large and may even increase further (Figure 3). This poses a risk to future growth, including in China and Australia. Any slowdown in global growth would impact on New Zealand.

These global imbalances are showing up in significant exchange rate movements, particularly in countries with floating exchange rate regimes. This is one reason why the New Zealand dollar is being held up at relatively high levels. The mix of uneven growth and the high exchange rate is limiting the ability of New Zealand's exports to fill the gap left by weak domestic spending.

Figure 4 - Revenue and expenses
Figure 4 - Revenue and expenses.
Source: The Treasury

The economic outlook is a little weaker than expected at Budget 2010. Growth is lower this year on the back of a slower than expected rebound in household spending. Underlying economic growth is weaker over the 2011 and 2012 March years, although this is partially offset by earthquake-related rebuilding activity which pushes up growth in the June 2011 and June 2012 years. Nominal GDP is expected to be a cumulative $5.2 billion lower over the 2011 to 2014 period than expected at Budget 2010.

The revision to the nominal GDP forecasts, combined with a higher than expected build up of corporate tax losses, has resulted in the revenue that the Government receives from tax being lower than forecast at Budget 2010 by a cumulative $3.2 billion from 2011 until 2014. This will flow through to net debt, which peaks at a higher level than previously forecast. Figure 4 shows the forecasts of both core Crown revenue and core Crown expenses compared with Budget 2010. Core Crown expenses fall from 2010/11 and core Crown revenue steadily increases from 2010/11. The total Crown operating deficit, before gains and losses, is initially larger than expected at Budget 2010, and is now forecast to be 5.5% of GDP in 2010/11. This is largely explained by lower tax revenue in the near term, and one-off events, such as the recognition of expenses associated with the recovery from the Canterbury earthquake and the re-phasing of expenses associated with the Weathertight Homes package. Despite this, the operating balance, before gains and losses, is forecast to break even in 2014/15, with the first surplus of note being forecast for 2015/16.

Economic Strategy

Our economic objectives for Budget 2011 reflect the Government's view of where the economy needs to be in the next three to five years.

  • First, we need to lift our rate of economic growth. The Treasury is forecasting average annual real economic growth of slightly less than 3% over the next four years. Higher growth will be needed if we are to close the income gap with Australia.
  • Second, we need to ensure that our economic growth is more balanced than during the previous period of expansion. To do this, we need to build an expansion that does not rely on debt and consumption, but on saving, investment and exports. Part of this is creating the right environment for our tradable sector - which comprises firms that compete internationally - to prosper. We need to ensure that the non-tradable sector, which includes government, does not absorb resources that could be put to better use in other areas.
  • Third, we want to see an economy where the gains from growth are widely distributed through sustainable employment and wage growth, where there are high levels of participation in the labour market and where unemployment is low.

In 2009 the Government outlined six policy areas where we see material opportunities to lift New Zealand's rate of economic growth and to reduce its vulnerability to future economic shocks. These areas are the tax system, public sector performance, education and skills, science innovation and trade, the regulatory environment and productive infrastructure - as Figure 5 shows. Taking advantage of opportunities in these areas will permanently lift the living standards of New Zealanders, which will allow us to afford better quality public services and infrastructure. Budget 2011 will build on the progress already made in these areas.

Strengthening our tax system

Figure 6 - Company tax rates
Figure 6 - Company tax rates.
Sources: OECD, the Treasury

The tax package the Government delivered in Budget 2010 is the biggest tax reform in New Zealand in 25 years. The 1 October 2010 tax changes were implemented smoothly. Further parts of the package, including the lowering of the company tax rate to 28%, the removal of tax depreciation on buildings, amending the tax treatment of loss attributing qualifying companies and tighter thin-capitalisation rules for foreign investors will apply from the 2011/12 income year. These changes will further improve incentives to work, save and invest and reduce tax biases in favour of property investment.

International dynamics, such as the steady reduction in OECD average company tax rates over several global business cycles, shown in Figure 6, underscore the need for ongoing work to ensure that the tax system continues to reflect New Zealand's evolving economic and social priorities. The Government will continue to consider the impact of the tax system on savings and investment behaviour.

Better, smarter public services

To realise our aim to lift productivity levels in the public sector, all major departments will face significant change over the next four years. We have already capped growth in the public service and moved almost $4 billion of spending into frontline public services such as health, education and law and order. Government Procurement Reform will also help to achieve public sector productivity gains. This includes a suite of initiatives on cost savings, building capability, simplifying suppliers' interactions with the Government and improving governance.

We are sharpening the economic policy advice we receive by using a series of working groups with clear briefs, tight timetables and a mix of public and private sector expertise. We have already had useful results from working groups in areas such as tax and capital markets.

The Welfare Working Group is closely examining the welfare system. A key focus for this group will be reducing long-term welfare dependency, which is associated with child poverty and adverse health consequences. In 2008, approximately 170,000 people had been on a benefit for at least five out of the last 10 years. The Welfare Working Group is due to report to the Government in early 2011.

Lifting education and skills

The Government has introduced National Standards, which will deliver improvements in literacy and numeracy skills among primary school children. In 2011 the Youth Guarantee will provide 2,500 places for 16 and 17 year olds to study school-level qualifications at a tertiary education institution fees-free. We have also made changes to the tertiary education sector to drive greater efficiency, value for money and enhanced performance incentives on institutions and students.

Looking ahead, we expect growth in the labour force to slow due to demographic changes. This means that the economy will need to exploit its skills potential to the full. We will need to become more effective in moving young people from education and training into the labour market, and also in utilising the skills of others such as older workers, part-time workers, migrants and women with dependent children who may want to work more. We will also need to reduce the incidence of young people becoming trapped into long periods of welfare dependency that reduce their attachment to the labour market.

Better science, innovation and trade agenda

In Budget 2010 we confirmed an investment of $337 million over four years in new research, science and innovation initiatives.This includes spending on technology development grants to support firms that invest productively in research and development, research infrastructure and the national Food Innovation Network of research and pilot facilities. We have also invested heavily in tourism, including an additional $30 million for increased destination marketing and a further $13 million to promote New Zealand as both a film production and tourism destination in a strategic partnership with the makers of The Hobbit films.

In addition to this, we will look to realise gains from our free trade agreements. New Zealand has recently signed agreements with China and South-East Asian nations, and we are developing others with Korea, India and Russia, as well as the Trans-Pacific Partnership.

Cutting red tape and unnecessary regulation

We are committed to improving the rigour and quality of both our existing regulation and new regulation. We have made it compulsory for all departments to assess the need for and effectiveness of each piece of legislation. A number of substantial reviews of existing regulation have or will soon be completed, largely focused on improving the quality of New Zealand's business environment and promoting growth. For example, we have simplified the Resource Management Act 1991, and further reforms are underway in areas such as water, infrastructure and urban design. Other significant reviews include employment law, the Building Act 2004 and the Securities Act 1978.

The Government will be establishing a Productivity Commission in early 2011 to provide a steady stream of independent policy advice. This Commission will help boost economic performance across the public and private sectors.

Investing significantly in productive infrastructure

The Government is investing heavily in ultra-fast broadband, road, rail and upgrading the national grid. Within land transport alone, $10.7 billion will be spent over the next 10 years on state highways, including Roads of National Significance. We will also bring a stronger commercial discipline to our investment decisions. An updated National Infrastructure Plan which sets out the Government's goals for infrastructure and a plan for how these will be achieved will be released in 2011.

We will improve the way we procure social assets, and we are exploring a range of procurement options to ensure value for money from Crown investment. An important milestone in this process has been the Government's announcement last month that it is taking the next step towards implementing a public private partnership for delivering a new prison at Wiri, South Auckland.

Fiscal Strategy

Our fiscal strategy is based on returning to operating surpluses, bringing debt down to prudent levels to rebuild our fiscal buffer and committing to a broad-base, low-rate taxation system that minimises economic distortions. As part of realising this strategy, we are continuing to reprioritise lower priority spending and are releasing an Investment Statement to improve the scrutiny and management of the Crown's balance sheet. Our fiscal strategy supports balanced and sustainable economic growth by reducing pressure on monetary policy and by allowing more resources to flow towards private sector activity - thereby helping to reduce our economic vulnerabilities.

Short-term intentions

Returning the Government's books to surplus is the immediate focus of our fiscal strategy. Achieving this will enable us to start restoring the Government's balance sheet, by reducing our level of debt, and will provide options in terms of future spending and taxation policies.

To underline our commitment to eliminating the operating deficit and returning to fiscal surpluses, we are clarifying our formal short-term intention for the operating balance. This Government is committed to returning the operating balance, before gains and losses, to surplus as soon as practical, and no later than 2015/16 - barring any significant shocks. This is in line with the fiscal forecast and also reflects the timeframe forecast in Budget 2010.

Figure 7 - Total Crown operating balance before gains and losses
Figure 7 - Total Crown operating balance before gains and losses.
Source: The Treasury

The operating deficit is expected to peak in 2010/11 with the total Crown operating deficit before gains and losses being $11.1 billion, or 5.5% of GDP, as Figure 7 shows. The deficit is larger than the 4.2% forecast at Budget 2010, partially owing to the recognition of one-off expenses associated with the recovery from the Canterbury earthquake and the re-phasing of expenses associated with the Weathertight Homes package. Lower tax revenue, owing to corporate tax losses and slightly weaker than expected economic activity in the near term, is also a factor. We are prepared to look through this deterioration given that it is driven by events that are one-off or largely temporary in nature, and given that tax revenue is expected to strengthen by the end of 2014/15.

Long-term objectives

Rebuilding a strong balance sheet, with low levels of debt, provides a buffer to help absorb any future shocks, and helps us to prepare for demographic changes - now upon us as the baby boomers begin to retire. Natural disasters and shocks can strike from time to time, as we have been reminded recently with the Canterbury earthquake, the collapse of South Canterbury Finance and the problems affecting our kiwifruit industry. Although the balance sheet has been strong enough to absorb the associated fiscal impact, events such as these only underline the need for a robust and prudently-managed balance sheet for the future.

We are committed to the long-term fiscal objectives outlined in Budget 2010. This Government will keep debt under control and ensure that it remains below 40% of GDP. We will ensure that net debt is brought back to a level no higher than 20% of GDP by the early 2020s. We will also build up our net worth to restore our fiscal buffer against future shocks. A strong Crown balance sheet, which New Zealand had prior to both the economic recession and the global financial crisis, enabled us to weather those events relatively well. Our commitment to maintaining a prudent fiscal position continues to separate us from countries facing severe fiscal adjustments with inevitable economic costs.

Net debt is our primary fiscal anchor for the long term. Currently, net debt is forecast to increase over the next few years and peak at 28.5% of GDP in 2014/15 - well below 40% of GDP, as Figure 8 shows. Net debt begins to decrease after we return to fiscal surplus in 2015/16. It is projected to be brought back beneath 20% of GDP in the early 2020s - in line with our long-term objective for debt.

Figure 8 - Net debt and net worth
Figure 8 - Net debt and net worth.
Source: The Treasury

Net worth is an important measure of long-term solvency and the fiscal sustainability of the Crown. Despite significant ongoing capital investment, the Crown's net worth is forecast to continue to decline in the short term as our debt grows faster than our assets. Over the five years from 2009/10, our total Crown net worth will decline by $11.9 billion, so that by 2014/15, our net worth is $83.1 billion, or 33.6% of GDP. Net worth begins to increase as a share of GDP from 2015/16, following the return to operating surpluses, and is projected to reach almost 50% of GDP by the early 2020s as we continue to strengthen the balance sheet.

Our long-term fiscal objectives and short-term fiscal intentions and are set out in Annex 1 to this Budget Policy Statement.

Achieving the fiscal strategy

Budget 2011 will progress the Government's fiscal strategy by meeting our commitment to contain new discretionary initiatives within a net operating allowance of $1.12 billion per annum and a capital allowance of $1.39 billion. As previously signalled in Budgets 2009 and 2010, the operating allowance has been reduced to $1.10 billion per annum from 2010/11, growing by only 2% per annum thereafter. The capital allowance remains fixed at no more than $1.39 billion for each Budget up until, and including, Budget 2014.

Living within these allowances is vital to controlling growth in spending and securing a return to fiscal surpluses. To support this restraint we are taking the following steps:

  • continuing to reprioritise existing lower priority spending
  • managing expense volatility, and
  • improving the management of the Crown's balance sheet.
Ongoing reprioritisation of lower priority spending

We want to see a fiscally-affordable public sector that delivers on our priorities and provides more services at a better quality, while being sufficiently flexible to meet our future expectations. Achieving this requires us to make a series of ongoing, and potentially significant, choices about which services we fund and how those services are provided.

As signalled in Budget 2010, the challenge of living within fixed operating and capital allowances means that most departments will receive no new funding for several years. This will be the case in Budget 2011. All departments, including those that do receive a portion of the fixed allowances, will need to make efficiency gains and reprioritise existing expenditure to manage underlying pressures and realise Government priorities.

In our first two budgets we freed up $4 billion over four years for allocation to higher priority initiatives in areas such as health, education and law and order. Budget 2011 will continue to deliver targeted savings – with the emphasis being on long-term sustainable savings, rather than one-off savings, with respect to both operating and capital expenditure.

Managing expense volatility

We will increase our control over higher-than-expected increases in expenses that can occur outside the annual allowance for new operating initiatives. These increases tend to occur in areas with fluctuating demand and/or cost pressures that have historically been updated, and adjusted for, at each six-monthly economic and fiscal update - for example, fluctuations in KiwiSaver expenses. When these types of expenses turn out to be higher than forecast, the operating deficit worsens. This can result in higher borrowing to pay for the unexpected increase.

Therefore, from Budget 2011 we will set aside a portion of the operating allowance for managing the net impact of this risk. If these expense revisions turn out to be lower than the portion set aside, the remainder of that portion can be used for other priorities, including deficit reduction. This prudent approach to fiscal management will assist us to reduce the deficit and achieve our planned return to fiscal surplus by 2015/16.

Demand and cost pressures associated with the education sector will also be brought inside the operating allowance. These pressures will be managed within the share of the allowance allocated for funding education services - mirroring the existing approach for the funding of health care services. This change will help to reduce risk to the forecast operating balance.

We will also establish an annual review of these sorts of expense changes that occur through the year. This will provide Cabinet with the opportunity to scrutinise major changes in expenses and commission remedial work in areas where expense trends may be of concern.

Improved management of the balance sheet

The Government's balance sheet is large - with our net worth being $95 billion, or 50.2% of GDP in the year ended June 2010. Although our net worth declines in the short term, as debt increases until we return to operating surplus, we are investing significantly in assets. Our assets are forecast to increase by $34.4 billion over the next five years to $257.8 billion, as we invest in roads, schools and hospitals and financial assets. Given this increase, and as the Crown's balance sheet comprises a significant portion of New Zealand's capital stock, it is vital that we manage it well.

The release of the first Investment Statement of the Governmentof New Zealand,in conjunction with Budget Policy Statement 2011 and Half Year Economic and Fiscal Update 2010, provides a comprehensive overview of the Government's assets and liabilities. It is an important step in improving the management of our balance sheet as a whole. Our intentions for how the balance sheet will be shaped and how the performance of the individual components will be improved focus on:

  • rebuilding the Crown's balance sheet buffer against future adverse events
  • systematically working to reduce the Crown's risk exposures, including through strengthening the economy
  • sharpening incentives on State agencies to use existing Crown capital well
  • continuing to look at introducing private sector capital and disciplines where appropriate to help drive up the performance of State assets, and
  • more actively reprioritising Crown capital to its highest value use.

The Investment Statement also signals that for the foreseeable future most agencies will not receive any new capital injections.

Conclusion

Budget 2011 will focus on ensuring balanced and sustainable economic growth, while delivering on our fiscal strategy. This Budget Policy Statement reaffirms our commitment to the prudent management of the Crown's balance sheet and to low levels of net debt. The release of the first Investment Statement of the Government of New Zealand supports that commitment by improving the information base for the Crown's balance sheet.

The Government will restore the fiscal buffer against future shocks by ensuring that net debt is brought back to a level no higher than 20% of GDP by the early 2020s. We will do this by returning the operating balance, before gains and losses, to surplus as soon as practical, and no later than 2015/16. Budget 2011 will support this plan by restraining new discretionary initiatives within an operating allowance of $1.12 billion per annum and a capital allowance of $1.39 billion, and by shifting existing spending towards higher value priorities.

Given the need to address the imbalances in our economy, and the need to restore our fiscal buffer, we will continue to consider our spending and revenue policies at each Budget. We will also continue to consider the scope and pace of our economic policy reform agenda. Budget 2011 will outline the next steps in the Government's strategy to lift economic growth on a sustainable basis, with particular focus on reducing the imbalances in the economy.

Hon Bill English
Minister of Finance

6 December 2010

Annex 1

Long-term fiscal objectives and short-term fiscal intentions

The Government remains committed to the long-term fiscal objectives set out in Fiscal Strategy Report 2010 (FSR) - asshown below in Table A1. These long-term objectives are consistent with the principles of responsible fiscal management.

The Government's short-term fiscal intentions have been revised since Budget 2010, consistent with the revisions to the fiscal forecasts (see Table A2). The short-term intention for the operating balance has also been clarified to state that the Government's intention is to return the operating balance, before gains and losses, to surplus no later than 2015/16, subject to any significant shocks. These revised fiscal intentions are consistent with the Government's long-term fiscal objectives.

Table A1 - Long-term fiscal objectives
Fiscal Strategy Report 2010

Debt

Manage total debt at prudent levels. Over the short to medium term it is prudent to allow an increase in debt to deal with the current economic and fiscal shock.

However, we need to ensure that this increase is eventually reversed and that we return to a level of debt that can act as a buffer against future shocks.

We will do this by ensuring that net debt remains consistently below 40% of GDP, and is then brought back to a level no higher than 20% of GDP by the early 2020s. We will work towards achieving this earlier as conditions permit.

Operating balance

Return to an operating surplus sufficient to meet the Government's net capital requirements, including contributions to the New Zealand Superannuation Fund, and ensure consistency with the debt objective.

Operating expenses

Reduce the growth in government spending to ensure operating expenses are consistent with the operating balance objective.

Operating revenues

Ensure sufficient operating revenue to meet the operating balance objective.

Net worth

Ensure net worth remains at a level sufficient to act as a buffer to economic shocks. Over the medium term, net worth will continue to fall as the impact of the global financial crisis unfolds. Consistent with the debt and operating balance objectives, we will start building up net worth ahead of the demographic change expected in the mid-2020s.

Table A2- Short-term fiscal intentions
Budget Policy Statement 2011 Fiscal Strategy Report 2010

Debt

Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) is forecast to be 36.9% of GDP in 2014/15.

Core Crown net debt (excluding NZS Fund and advances) is forecast to be 28.5% in 2014/15.

Debt

Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) is forecast to be 35.3% of GDP in 2013/14.

Core Crown net debt (excluding NZS Fund and advances) is forecast to be 26.5% in 2013/14.

Operating balance

Based on the operating allowance for the 2010 Budget, the operating deficit is forecast to be 1.9% of GDP in 2011/12. The operating balance is forecast to be 1.1% of GDP in 2014/15.  This is consistent with the long-term objective for the operating balance.

Our intention is to return the operating balance, before gains and losses, to surplus as soon as practical and no later than 2015/16, subject to any significant shocks.

Operating balance

Based on the operating allowance for the 2010 Budget, the operating deficit is forecast to be 3.5% of GDP in 2010/11. The operating deficit is forecast to be 0.3% of GDP in 2013/14.  This decrease is consistent with the long-term objective for the operating balance.

Expenses

Total Crown expenses are forecast to be 40.8% of GDP in 2014/15. 

Core Crown expenses are forecast to be 31.7% of GDP in 2014/15.

This assumes a new operating allowance of $1.12 billion per annum, continuing to grow at 2% for Budgets thereafter (GST exclusive).

Expenses

Total Crown expenses are forecast to be 42.4% of GDP in 2013/14. 

Core Crown expenses are forecast to be 32.4% of GDP in 2013/14.

This assumes a new operating allowance of $1.1 billion per annum for the 2010 Budget, growing at 2% for Budgets thereafter (GST exclusive).

Revenues

Total Crown revenues are forecast to be 40.8% of GDP in 2014/15. 

Core Crown revenues are forecast to be 30.9% of GDP in 2014/15.

Core Crown tax revenues are forecast to be 27.7% of GDP in 2014/15.

Revenues

Total Crown revenues are forecast to be 41.1% of GDP in 2013/14. 

Core Crown revenues are forecast to be 30.7% of GDP in 2013/14.

Core Crown tax revenues are forecast to be 27.5% of GDP in 2013/14.

Net worth

Total Crown net worth is forecast to be 33.6% of GDP in 2014/15. Core Crown net worth is forecast to be 8.6% of GDP in 2014/15.

Net worth

Total Crown net worth is forecast to be 34.8% of GDP in 2013/14. Core Crown net worth is forecast to be 10.7% of GDP in 2013/14.

Figure 5 - Six policy areas to lift growth and create jobs
Figure 5 - Six policy areas to lift growth and create jobs.