Responsible spending will restrict rate rises

The Government has confirmed it will stick to its $1 billion new operating allowance in Budget 2014 and the allowance will increase to $1.5 billion in Budget 2015, Finance Minister Bill English says.

The allowance will then increase by 2 per cent each Budget.

“These modest increases in spending meet the Government’s objective of reducing net debt to 20 per cent of GDP by 2020, and will not materially affect interest rates,” Mr English says.

The operating allowance is the amount set aside in each Budget for new policy initiatives - either spending or revenue.

“Treasury advice I’m issuing today confirms that lifting annual Budget allowances to $1.5 billion a year is around the upper limit before they begin to materially affect interest rates,” Mr English says.

“It’s important that we do not return to the big spending increases of the mid-2000s which, together with a doubling of house prices, forced the Reserve Bank to push up interest rates at a significant cost to households and businesses.

“This confirms the Government’s commitment to ongoing spending restraint to meet our fiscal objectives and to keep pressure off interest rates.

“It will also provide the Government with more options around targeting extra investment in quality public services and to consider modest tax reductions in future years.

“There will be room to move some of the allowances between Budgets, providing they average around $1.5 billion and economic conditions permit.”

Treasury forecasts show the Government’s books continuing to improve as the economy grows and the Government maintains its careful and responsible management of public services and government spending.

Budget 2014 forecasts the operating balance before gains and losses will be in surplus by $372 million next year – a sharp improvement on the $18.4 billion deficit in 2010/11 and the $3.9 billion deficit the Government inherited in 2008/09.

Net core Crown debt is forecast to peak on an annual basis at 26.4 per cent of GDP in 2014/15, and decline thereafter. Longer-term projections show net debt dropping to 20 per cent of GDP in 2019/20 - meeting the Government’s debt objective.

“Spending restraint and a growing economy have led to a remarkable turnaround in the books,” Mr English says. “At the same time, the Government has achieved much better results from public services.”

Net of reprioritisation, the cost of the Government’s new spending and revenue initiatives over the past six Budgets have totalled less than $2.7 billion in the final year of the forecast period. By comparison, the last six Budgets of the previous Government totalled $20 billion.

Core Crown expenses have fallen from around 34.4 per cent of GDP in 2008/09 to a forecast 30.3 per cent of GDP in the 2014/15 financial year. They are then expected to go under 30 per cent of GDP and stay below that level.

“Future surpluses will allow the Government to pay for capital spending and begin reducing debt built up during the years of budget deficits,” Mr English says.

“Paying down debt is our priority, as the Crown’s net debt has risen by around $50 billion since 2008.”

The Government’s capital requirements in the next two Budgets will continue to be met by reprioritisation of the government’s balance sheet, in particular drawing on proceeds from the share offer programme through the Future Investment Fund.

After net debt has gone below 20 per cent of GDP, the Government intends to manage this debt within a range of 10 to 20 per cent of GDP over the economic cycle.

It will also restart contributions to the New Zealand Superannuation Fund - projected to resume in 2019/20 when net debt reaches 20 per cent of GDP.

Treasury’s report “The macroeconomic effects of a change in the fiscal impulse” is available at:

http://www.treasury.govt.nz/publications/informationreleases/budget/2014