Brighter books


In 2008 when John Key first became Prime Minister and handed his deputy Bill English the role of Finance Minister, Treasury was forecasting a decade of deficits.

Eight years later, ss The PM steps down, the Finance Minister is about to step into his shoes and Economic Development Minister Steven Joyce is poised to take over the finances, the books are looking much brighter:

Treasury’s latest forecasts show the Government’s programme of responsible economic and fiscal management is delivering benefits for New Zealanders, Finance Minister Bill English says.

“Economic growth is expected to average around 3 per cent over the next five years – considerably stronger than forecast in Budget 2016 – supporting more jobs, falling unemployment and higher incomes,” Mr English says.

“The more positive outlook for the economy is driven by high levels of construction activity, exports (particularly tourism), a growing population and low interest rates.”

The 2016 Half Year Economic and Fiscal Update forecasts unemployment to  drop to 4.3 per cent by 2020/21. Over the same period Treasury expects another 150,000 jobs to be created and the average wage to increase by $7,500 to $66,000.

“While the recent Kaikoura earthquakes have had a major impact on affected families and businesses, they are not expected to disrupt the overall momentum of the economy,” Mr English says.

“However, the earthquakes do highlight the importance of paying off debt in the good times so that the Government can support New Zealand communities in challenging times.”

Treasury estimates the total fiscal cost of the earthquakes will be about $2 billion to $3 billion, some of which will be funded by insurance proceeds or existing funds. Net costs of $1 billion have been included in this year’s forecasts. 

The operating balance before gains and losses (OBEGAL) is forecast to be $473 million in surplus this year, rising to $8.5 billion over the forecast period.

The Half Year Update shows net debt peaked as a proportion of GDP in 2015/16 – a year earlier than previously expected – and is expected to fall to 18.8 per cent of GDP by 2020/21.

Mr English says the accompanying Budget Policy Statement confirms the operating allowance will remain at $1.5 billion for each of the next four Budgets.

The capital allowance for Budget 2016 has been increased from $900 million to $3 billion in Budget 2017 and to $2 billion in future Budgets to provide for a number of high quality infrastructure and investment projects.

Contributions to the NZ Super Fund are forecast to restart in 2020/21 once net debt falls below 20 per cent of GDP.

The Half Year Economic and Fiscal Update and Budget Policy Statement can be found here and here.

Summary of Economic and Fiscal Forecasts
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Quality and results matter most


The government accounts were in surplus for the second time this financial year:

The Government’s $448 million OBEGAL surplus in the 10 months to 30 April – around $1 billion better than the $555 million deficit forecast in the Budget – highlights the inherent volatility in monthly fiscal results, Finance Minister Bill English says.

“We’ve always said small differences between large revenue and expenditure numbers can lead to swings of several hundred million dollars in the OBEGAL balance,” he says. “From the Government’s point of view, what matters is the quality of our spending, the results we get from that spending and clear improvement in our overall fiscal direction.

This government recognises that the quality of the spend and the results it gets are what matter.

That contrasts with previous administrations which put more emphasis on the quantity of their spend, regardless of whether it made a positive difference.

“We won’t know whether we will make surplus for the full year until we see the final accounts in October. But it’s clear it will be a close run thing.”

April was the second month this financial year where the Government has achieved a surplus, following a $77 million surplus in the seven months to 31 January.

The April surplus was the result of core Crown tax revenue being $437 million ahead of Treasury’s budget forecasts, core Crown expenditure being $420 million below forecast and results from State Owned Enterprises and Crown entities being $172 million better than forecast.

“The Treasury advises that, based on the April results, there is now some upside risk in both tax revenue and Crown expenses,” Mr English says. “However, it’s not yet clear how much of this latest overall improvement will carry through to the full year’s result.

“Whatever happens, the Government will continue with its responsible and balanced economic and fiscal programme, which is taking New Zealand in the right direction.”

The return to surplus is important, but whether it happens this year or next doesn’t matter nearly as much as the continuation of responsible management of public money and using it on policies which get the right results.

Surplus for 7 months


The government books are showing a surplus:

The operating balance before gains and losses (OBEGAL) for the seven months to January was a surplus of $77 million, driven by higher than expected tax revenue and lower than expected operating expenses, Finance Minister Bill English says.

“This is the first time the Government’s books have shown a part-year surplus since 2009. Although it is too early to say whether we will have a surplus for the full 2014/15 year, this result demonstrates the strides we have made in improving the Government’s finances,” Mr English says.

The OBEGAL outturn was $712 million better than the $635 million deficit forecast by the Treasury in the Half-Year Update (HYEFU) in December, but was still $120 million below Treasury’s Budget 2014 forecast, undertaken at the start of the fiscal year.

Corporate tax was $158 million, or 3.2 per cent above the HYEFU forecast and source deductions were $146 million, or 1.0 per cent above forecast.

“Although corporate tax and source deductions were both ahead of forecast for the seven months to January, these latest figures underscore the difficulty in forecasting the difference between two large numbers,” Mr English says.

“We won’t know until the final accounts are published in October whether we will achieve a surplus for the whole year. The variance of both tax and expenditure from forecasts reinforces that message.”

Core Crown expenses for the first half of the financial year were $249 million lower than forecast at HYEFU.

“The Government is continuing to responsibly manage its finances. Core Crown expenditure for 2014/15 is forecast to be $4.1 billion lower than forecasts made when we first set the surplus target back in 2011,” Mr English says.

This is on-track to an annual surplus.

Whether or not that is reached this financial year or next it is a significant achievement and good reflection on the government’s careful management.

It has turned around the decade of deficits forecast in Labour’s last year in government and has been achieved in spite of the financial turmoil and natural disasters the government had to face.

Still focussed on surplus


The Government believes an OBEGAL surplus is achievable this financial year, despite Treasury’s latest forecast predicting a $572 million deficit (0.2 per cent of GDP) for the year to 30 June 2015, Finance Minister Bill English says.

“These forecasts emphasise the unusual conditions the New Zealand economy is experiencing,” Mr English says. “Treasury is predicting solid growth, growing employment and low interest rates, which help New Zealanders to get ahead. But at the same time, falling dairy prices and low inflation are restricting growth in the nominal economy and government revenue.

“This is making it more challenging for the Government to achieve surplus in 2014/15. However we remain on track to reduce debt to 20 per cent of GDP by 2020.

“Although this latest Treasury forecast predicts a small deficit for the current year, we believe the strong underlying economy and responsible fiscal management can deliver a surplus when the final government accounts are published next October,” Mr English says.

Whether we return to surplus this year or next, the government’s careful management has turned the economy around in the face of financial and natural disasters and has protected the most vulnerable people while doing it.

Previous forecasting rounds show the outlook can change significantly between the Half Year Update and the final accounts being published. As recently as 2012/13, the final OBEGAL deficit was $2.9 billion smaller than the previous HYEFU forecast.

“The Government has a track record of sticking to our spending plans to protect the most vulnerable and to provide certainty for users of public services. We won’t be changing that approach,” Mr English says.

“Despite the lower than expected revenue forecasts, the Government’s ongoing commitment to spending restraint means the public finances continue to improve significantly each year.”

The OBEGAL deficit has shrunk significantly from a peak of 9 per cent of GDP in 2010/11. Net core Crown debt is expected to peak in the current fiscal year at 26.5 per cent of GDP and then reduce to 19.1 per cent of GDP in 2020/21. A residual cash surplus is now expected in 2017/18, a year earlier than forecast previously, which is also when the Government intends to start repaying debt in dollar terms. 

The Budget Policy Statement released today confirms that allowances for Budget 2015 and Budget 2016 have each been reduced to $1 billion. The allowance has been re-phased over three years to provide a $2.5 billion allowance in Budget 2017.

“This will allow us to consider modest tax cuts and/or additional debt repayment in Budget 2017, as economic and fiscal conditions allow,” Mr English says.

Treasury’s forecasts suggest that New Zealand’s economic growth potential before inflation sets in – essentially the speed limit of the economy – is higher than estimated previously.

New Zealand recorded 3.9 per cent economic growth over the year to June, which was one of the higher rates among developed countries. Other positive economic indicators include:

  • GDP growth is expected to average almost 3 per cent over the next five years, better than the Euro area, the US, the UK, Japan and Canada.
  • Interest rates are staying lower for longer, with mortgage interest rates still just above 50-year lows.
  • Household disposable income is increasing faster than inflation – rising 9 per cent in real terms in the last four years. It is forecast to increase by another 9 per cent over the next four years.
  • Recent job growth is expected to continue. There are 72,000 more people employed now than there were a year ago. An additional 153,000 people are forecast to be in work by mid-2019.
  • The average full-time wage is expected to rise by $8,000 to around $64,000 by mid-2019.
  • Unemployment, currently at 5.4 per cent, is forecast to fall to 4.5 per cent by 2018. 

“Achieving those goals is possible only with a continuation of the sustained economic growth this Government’s careful economic management is helping to deliver,” Mr English says.

Most other countries would envy us these indicators.

National remains focused on returning to surplus, growing our economy, and supporting more jobs.

Govt books better than forecast


More good news on the economic front – the government books are better than forecast:

A stronger economy is underpinning tax revenue and, combined with responsible control over spending, kept the OBEGAL deficit below $4 billion in the 10 months to 30 April, Finance Minister Bill English says.

The $3.99 billion deficit is $664 million smaller than in the latest forecasts finalised before the Budget.

“A number of indicators confirm that New Zealanders can look to the future with some well-earned confidence and optimism,” Mr English says. “The economy is growing more strongly, new jobs are being created, unemployment is coming down and business and consumer confidence have picked up.

“The Government is supporting these positive trends with a common-sense economic programme focused on giving businesses the confidence to invest, grow and create new jobs. The plan is working and the benefits are starting to show through in the Government’s finances, as we remain on track to surplus in 2014/15.”

Post Budget commentary was almost all positive and several commentators finally admitted that the Key-English prescription is working.

In particular, in the 10 months to 30 April, core Crown tax revenue was $3.1 billion higher than in the corresponding period the previous year. This was due mainly to increases in source deductions and other individuals’ tax, and we are also seeing benefits from the Government’s tax package in 2010 broadening the tax base.

At the same time, the Government is keeping control of its spending, with core Crown spending slightly below forecast at $57.8 billion. Net core Crown debt at $60 billion – or 28.7 per cent of GDP – was $441 million below forecast as at 30 April.

“It’s important that we cap and then start reducing this debt by sticking to sound fiscal and economic management,” Mr English says. “That will allow us to meet our second fiscal target of reducing net debt to no more than 20 per cent of GDP by 2020.”

A broader tax base and better control of government spending are both showing benefits.

This isn’t just good for the books, it’s good for the economy and that is good for people.

Less money taken from taxpayers and less wasted on unnecessary initiatives leaves more for those who make it and those who need it.

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