The Economy of New Zealand: Overview (continued)

Response to Recession and International Credit Crisis

Since taking office in November 2008, the new government has announced a number of initiatives aimed at mitigating the effects of the recession and the global credit crisis. These include:

• An accelerated package of ‘ready-to-roll' infrastructure projects spanning the housing, transport, education and energy sectors at an estimated cost of almost $500 million, of which around $100 million worth of projects will start in the current financial year.
• A small business relief package designed to assist small and medium-sized businesses (which make up the largest proportion of New Zealand businesses) in order to reduce compliance and improve the business environment in the face of the crisis. The package includes the following elements:
  • a suite of 11 tax changes costing $480 million over four years, with around $270 million of extra cashflow remaining in businesses in the current financial year ending 30 June 2009;
  • an expansion to the export credit scheme;
  • extended jurisdiction for the Disputes (small claims) Tribunal to reduce the number of disputes going through lengthy court processes;
  • expansion of business advice services; and
  • a prompt-payment requirement for government agencies.
• Wholesale Funding and Retail Deposit Guarantees.

The primary objective of the two-year opt-in retail deposit guarantee scheme is to ensure public confidence in New Zealand's financial system given the international financial market turbulence. Bank and non-bank deposit-takers must apply to the Treasury for approval to participate in the scheme and, in certain cases, pay fees to the New Zealand Government based on amount of deposits guaranteed, growth in deposits and deposit-taker rating.

The primary objective of the opt-in wholesale funding guarantee facility is to facilitate access to international markets by New Zealand financial institutions in a global environment where international investors remain highly risk averse and where many other governments have offered guarantees on domestic banks' wholesale debt. The New Zealand Government receives a fee from each participating institution based on the institution's credit rating and the term and amount of guaranteed debt issued.

Fiscal Policy

Prudent Fiscal Management:  The Public Finance Act 1989

In 1994, the Government enacted the Fiscal Responsibility Act. The Act was intended to assist in achieving consistent, good quality fiscal management over time, which would enable the Government to make a major contribution to the economic health of the country and be better positioned to provide a range of services on a sustained basis. This Act has now been repealed but its provisions have largely been incorporated into Part 2 of the Public Finance Act 1989.

Part 2 requires the Crown's financial reporting to be in accordance with New Zealand Generally Accepted Accounting Practice. The primary fiscal indicators are the operating balance, debt and net worth.

Part 2 requires the Government to pursue its policy objectives in accordance with the principles of responsible fiscal management set out in the Act. These include:

• reducing debt to prudent levels to provide a buffer against future adverse events;
• maintaining, on average, operating balance once prudent debt levels are reached i.e., the Government is to live within its means over time, with some scope for flexibility through the business cycle;
• achieving and maintaining levels of net worth to provide a buffer against adverse events;
• managing the risks facing the Crown; and
• pursuing policies that are consistent with a reasonable degree of predictability about the level and stability of future tax rates.

Key Fiscal Indicators

Operating Balance: Following a prolonged period of fiscal deficits, New Zealand achieved surpluses in 1993/94 and remained in surplus until 2007/08.

Core Crown operating expenses have been reduced as a percentage of GDP from over 40% in 1992/93 to 31.7% in 2007/08. Expenses have been controlled with output budgeting, accrual reporting and decentralised cost management.

In 2007/08, the operating balance was a surplus of $2.384 billion. The December 2008 Update (main scenario) forecasts for 2008/09, 2009/10, 2010/11, 2011/12 and 2012/13 are for deficits of $4.329 billion, $1.990 billion, $3.598 billion, $3.609 billion and $3.333 billion respectively.

Net debt: Net debt has fallen from 49% of GDP in 1992/93 to 0% in 2007/2008. Debt repayments have been financed from operating surpluses, and asset sales proceeds pre 1999.

Net worth: Net worth increased from $96.8 billion in 2006/07 to $105.5 billion in 2007/08. This improvement reflects the ongoing operating surplus plus revaluations of physical assets.

The January Financial Statements of the Government released on 6 March 2009 reported that both the operating balance and net worth were tracking lower than expected against the December Update. The variance was mainly driven by valuation changes in the liability of the Accident Compensation Corporation (ACC). The lower than forecast operating balance has limited impact on the cash position as the majority of the weaker investment returns are valuation changes and so are non-cash.

Both tax revenue and expenses were tracking close to expectation.

Losses arose in the New Zealand Superannuation Fund (NZSF) as a result of the sharp downturn of the financial markets (equity, commodities and property markets) during the period for September 2008 to January 2009. Weakness in the New Zealand dollar relative to foreign currencies also contributed to the losses in the NZSF.

Fiscal Objectives

The new government has announced it will set new fiscal objectives in the 2009 Fiscal Strategy Report to be published on 28 May 2009 in conjunction with the 2009 Budget. The government's focus will be on ensuring a stable economic environment, underpinned by a plan to set revised objectives, and taking credible and achievable steps to stop debt rising and eventually reduce debt and maintain net worth. Achieving this will mean a focus on influencing the fiscal aggregates, such as debt and net worth measures, over a long time period, lifting growth in the economy and constraining expenditure. The government's objective is to lift growth through reducing regulation, lowering taxes and lifting productivity. A public service that delivers quality services and better value for money will be an important component of achieving the fiscal objectives.

Direct Public Debt

Prior to March 1985, successive governments had borrowed under a fixed exchange-rate regime to finance the balance of payments deficit. Since the adoption of a freely floating exchange-rate regime, governments have undertaken new external borrowing only to rebuild the nation's external reserves and to meet refinancing needs.

Direct public debt increased by a net amount of $702 million including swaps between 1 July 2007 and 30 June 2008. This increase was due to a net increase in internal debt of $702 million. There was no change in external debt.

Government gross direct debt amounted of 17.7% of GDP in the year ended June 2008, down from 18.9% the previous year.