Govt finances reflect careful management

Treasury’s latest forecasts show ongoing improvement in the Government’s books – reflecting a continued focus on responsible fiscal management, Finance Minister Bill English says.

“Treasury forecasts solid economic growth over the next five years, averaging 2.7 per cent per annum – picking up from a weaker performance in the first half of 2015.

“The positive outlook for the economy over the next few years is driven by the Canterbury rebuild, supportive monetary policy, construction in Auckland, export growth supported by a lower dollar and migration.”

Treasury expects unemployment to drop to 4.5 per cent after peaking at 6.5 per cent in March 2016. 195,000 jobs are expected to be created by mid-2020, and the average wage is forecast to increase by $6,000 to $63,500.

After successfully meeting its surplus target in 2014/15, the Government’s five fiscal priorities have been updated.

“This does not signal a change in direction - we will continue to focus on keeping a tight rein on spending, running surpluses and paying down debt,” Mr English says.

The revised Operating Balance Before Gains and Losses (OBEGAL) and net debt priorities are:

• maintaining rising OBEGAL surpluses over the forecast period so that cash surpluses are generated, and
• reducing net debt to around 20 per cent of GDP in 2020 and, in the medium term, to within a range of 0 to 20 per cent of GDP.

The OBEGAL is expected to be broadly balanced over the next few years, before rising rapidly in 2018/19 – although Treasury forecast a small deficit in 2015/16 due to the recent weaker economic outturn.

“The books are broadly in balance - so in the immediate future we will not distinguish between forecasts of a small negative or small positive OBEGAL.

“The 2014/15 surplus demonstrates how things can change in a short time, with a $572 million forecast deficit at HYEFU last December turning into a $414 million surplus by the end of the fiscal year.”

The Budget Policy Statement confirms the operating allowance remains at $1 billion for Budget 2016, $2.5 billion for Budget 2017 and $1.5 billion in Budget 2018 – although some rephrasing between Budgets is possible.

Net debt is expected to be 21.9 per cent of GDP in 2020/21, after peaking at 27.7 per cent in 2016/17.

The capital allowance for Budget 2016 has been increased by $1 billion, given the Future Investment Fund has now been fully allocated – although the Government is looking at ways to reprioritise existing capital to cover at least some of this increase.

“Given the pipeline of high quality investment priorities, we consider it is an appropriate time to provide additional funding,” Mr English says.

The Half Year Economic and Fiscal Update and Budget Policy Statement are available at: www.treasury.govt.nz/budget/2016/bps and www.treasury.govt.nz/budget/forecasts/hyefu2015

SUMMARY OF ECONOMIC AND FISCAL FORECASTS

THE GOVERNMENT’S FIVE FISCAL PRIORITIES

1. Maintaining rising operating surpluses (before gains and losses) over the forecast period so that cash surpluses are generated and net government debt begins to reduce in dollar terms
2. Reducing net government debt to around 20 per cent of GDP in 2020 and, in the medium term, reducing net debt to within a range of 0 to 20 per cent of GDP
3. Implementing a new funding policy for the Accident Compensation Corporation (ACC), following previous levy reductions
4. If economic and fiscal conditions allow, beginning to reduce income taxes from Budget 2017, and
5. Using any further fiscal headroom – including from positive revenue surprises – to reduce net debt faster.