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The Economy of New Zealand: Overview (continued)
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 This Act has now been repealed but its provisions have largely been incorporated into Part 2 of the Public Finance Act 1989.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 (GAAP). 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
An extended period of growth led to a strong fiscal position for the government in the 2007/08 year. However, the recession that began in New Zealand in the first quarter of 2008 resulted in revenue decreases and expenditure increases which weakened the fiscal position in the 2008/09 year.
Operating Balance: Following a prolonged period of fiscal deficits, New Zealand achieved surpluses in 1993/94 and remained in surplus until 2007/08.
In 2008/09, the operating balance was a deficit of $10.505 billion. The December 2009 Half-year Economic and Fiscal Update forecasts for the operating balance for 2009/10, 2010/11, 2011/12, 2012/13 and 2013/14 are for deficits of $4.8 billion, $5.1 billion, $4.2 billion, $3.7 billion and $2.7 billion respectively.
Core Crown operating expenses as a percentage of GDP fell to 31.8% in 2007/08 before rising again to 35.5% in 2008/09. Expenses are controlled through output budgeting, accrual reporting and decentralised cost management.
Net debt: Net debt fell to 6% of GDP in 2007/08 but rose to 9.5% of GDP in 2008/09 as a result of additional borrowing undertaken to offset the government's operating deficit.
Net worth: After a prolonged period of increases, net worth decreased during 2008/09 from $105.5 billion at the end of June 2008 to $99.5 billion in June 2009 as a result of the operating deficit, offset by asset revaluations.
Fiscal Objectives
The government revised the long-term fiscal objectives in the 2009 Fiscal Strategy Report published with the 2009 Budget. The Fiscal Strategy Report also re-specified the long-term debt objective in ‘net debt' terms. Net debt is seen as providing a more complete guide to the fiscal constraint because it is determined by the level of gross debt and financial assets. The net debt indicator is less affected by operational issues that have affected the interpretation of gross debt (e.g. increases in the amount of settlement cash deposited with the Reserve Bank for monetary policy purposes). Nonetheless, the definition of net debt adopted in the Fiscal Strategy Report differs from that previously reported in that it no longer includes advances (e.g., student loans) as a financial asset.
The revised long-term debt objective allows an increase in debt over the short to medium term in response to the economic and financial crisis. However, the government considers that this increase needs eventually to be reversed, and so the objective also requires net debt to remain consistently below 40% of GDP, and to return to around 30% of GDP no later than the early 2020s. Over the longer term, the government considers that it is prudent, given the nature of economic shocks likely to be faced by New Zealand, to have net debt closer to 20% of GDP.
The revised long-term objective for the operating balance aims for a 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.
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 $9,384 million including swaps between 1 July 2008 and 30 June 2009. This increase was due to a net increase in internal debt of $7,254 million and an increase in external debt of $2,310 million, principally due to increased issuance of Treasury bills and government domestic bonds to meet the government's funding requirements in the wake of the international credit crisis. (The increase in external debt arose through increases in collateral and the impact of foreign-currency swaps.)
Government gross direct debt amounted of 23.1% of GDP in the year ended June 2009, up from 17.7% the previous year.
