Our fiscal strategy takes a balanced approach to supporting current and future generations by managing debt prudently and reducing the deficit caused by COVID-19, while growing the economy sustainably and investing in important public services like health and education.
While New Zealand is not immune to the impact of COVID-19 on the global economy, we went into the pandemic with some of the lowest public debt in the world and continue to have one of the strongest economic and fiscal positions among advanced economies. This means we have the space to continue supporting the economic recovery, and already have funding set aside to fight a resurgence if needed, while maintaining a sustainable and prudent level of debt.
At Budget 2020, the long-run objectives and short-term intentions (objectives and intentions) were updated to recognise the change in the domestic and global economic environment due to the COVID-19 pandemic, and the need to cushion the blow and support the recovery. We committed to updating and refining these objectives and intentions as the economic and fiscal picture became clearer and as the economy continued to recover. Since the most recent Fiscal Strategy Report (FSR) was published in May 2020, the Government has refined the objectives and intentions to reflect the current outlook and global economic situation, given the economic impact of COVID-19. The updated objectives and intentions are presented below:
The Government will stabilise net core Crown debt as a percentage of GDP by the mid-2020s and then reduce it as conditions permit (subject to any significant shocks)
The long-term debt objective has been updated since the May 2020 FSR The updated objective recognises that it is prudent to use Government debt carefully to support the response, recovery and rebuild from the 1-in-100-year economic shock caused by COVID-19. Recent economic growth and careful management of Government spending mean that net core Crown debt is now forecast to peak lower than in Budget 2020, at 52.6% of GDP in the 2022/23 year, before starting to fall. Even at this peak, New Zealand's net debt as a percent of GDP remains lower than that of most other advanced economies based on comparable measures.
Figure 3 - General government net debt in 2023 (% of GDP)
Source: IMF World Economic Outlook (WEO) database, October 2020
By the end of the forecast period in 2024/25, net core Crown debt is forecast in the Half Year Update to have fallen to 46.9% of GDP. Looking through the temporary fiscal impact of the Reserve Bank's Funding for Lending Programme (FLP), as the Treasury has advised, net core Crown debt is forecast to be 45.5% of GDP at the end of the forecast period.
The volatility of the global economic situation as a result of COVID-19 means the Government has not set a specific numerical debt target for this period. Pursuing a fixed target set against the extreme volatility currently in the global economy could lead to policy and spending choices that undermine our recovery and increase inequality. The Government is instead signalling a strong direction of travel. The Government will be able to set a more specific target as the global economic outlook and conditions normalise as the virus is brought under control.
Given the nature of the COVID-19 global economic shock and the need to support the economy, debt remains at prudent levels throughout the forecast and projection period, and there remains space in the Government's fiscal strategy to respond to future shocks. The Government's strong fiscal strategy and New Zealand's comparatively favourable debt position compared to other advanced economies mean credit rating agencies have maintained their strong ratings on New Zealand Government Bonds through COVID-19. In a recent ratings report, Standard & Poor's noted that New Zealand was in a strong fiscal position before the pandemic hit and that proactive policy making supports sustainable public finances and economic growth. Moody's continues to rate New Zealand Government debt at its strongest Aaa rating, while Fitch most recently retained its strong AA+ local currency rating.
The Government will run an operating balance consistent with meeting the long-term debt objective
The long-term objective for the operating balance has been updated since the May 2020 FSR. The updated objective recognises that, in the current global environment, it is important that the Government invests to cushion the blow from COVID-19 and support the economic recovery. Furthermore, interest rates are at historic lows and the economy is growing faster than the interest payments on government debt.
The Half Year Update forecast the OBEGAL deficit will have improved to just 1% of GDP at the end of the forecast period. In comparison, the OBEGAL deficit did not fall below 1% of GDP until the seventh year following the Global Financial Crisis (GFC).
The Government will use fiscal policy to secure the economic recovery for New Zealand and reduce deficits over the forecast period as economic conditions allow
The Government's short-term intention for the operating balance has also been updated since the May 2020 FSR. The new intention focuses on reducing the deficit caused by COVID-19, while maintaining flexibility to respond to the pandemic if required.
Responsible fiscal management at this point in time requires the active use of fiscal policy to secure the economic recovery and support the bounce-back in employment to pre-COVID-19 levels. Given the unprecedented size of the 1-in-100-year economic shock caused by COVID-19 and the need for a strong and ongoing fiscal response, the Government determines that the current fiscal strategy is prudent, particularly as New Zealand’s fiscal position is strong compared to other countries facing the same global economic conditions.
The Government is continuing its approach to the short-term operating balance intention as in the May 2020 FSR with regard to the fiscal management principles in the Public Finance Act 1989. Section 26G(2) of the Act allows the Government to depart from the principles on a temporary basis. Doing so in this case for the short-term operating balance intention is the right thing to do, given the unprecedented size of the global economic shock caused by COVID-19, and the need for the Government to provide a strong ongoing fiscal response to protect lives and livelihoods in New Zealand.
Once the economic recovery is secured and the global economic context normalises, the Government will be in a position to return to the principles that guided its approach to fiscal management prior to COVID-19.Based on the current long-run projections from the fiscal strategy model, we are projected to return OBEGAL to surplus within the next decade. Given the scale of the global economic slowdown and the degree of uncertainty in economic forecasts, the Government will take a flexible approach to what a reasonable timeframe is for doing so, and respond as needed to ensure that New Zealand bounces back strongly from the current economic challenges without putting New Zealanders’ wellbeing at risk.
The other short-term intentions and long-term objectives remain unchanged from those set out in the May 2020 FSR, and can be found below.
Budget 2021 will accord with the short-term intentions referred to in the most recent FSR after incorporating the amended short-term operating balance intention above and subject to revisions to the Treasury's economic and fiscal forecasts, through the Budget 2021 decision-making process and the Budget allowances.
Table 5: Fiscal intentions and objectives
|Short-term intention||Long-term objective|
|Debt||Our intention is to allow the level of net core Crown debt to rise in the short term to fight COVID-19, cushion its impact and position New Zealand for recovery.||The Government will stabilise net core Crown debt as a percentage of GDP by the mid-2020s and then reduce it as conditions permit (subject to any significant shocks).|
|Operating balance||The Government will use fiscal policy to secure the economic recovery for New Zealand and reduce deficits over the forecast period as economic conditions allow.||The Government will run an operating balance consistent with meeting the long-term debt objective.|
|Expenses||Our intention is to ensure expenses are consistent with the operating balance objective.||The Government will ensure operating expenses support a responsible and proportionate role for the Government in maintaining a productive, sustainable and inclusive economy, consistent with the debt and operating balance objectives.|
|Revenue||Our intention is to ensure revenue is consistent with the operating balance objective.||The Government will ensure a progressive taxation system that is fair, balanced and promotes the long-term sustainability and productivity of the economy, consistent with the debt and operating balance objectives.|
|Net worth||Our intention is to use the Crown's net worth to fight COVID-19, cushion its impact and position New Zealand for recovery. Significant risks will be transferred onto the Crown's balance sheet through the response period.||The Government will use the Crown's net worth to maintain a productive, sustainable and inclusive economy, consistent with the debt and operating balance objectives.|
-  Net debt objective in the May 2020 FSR: “The Government will stabilise and then reduce net core Crown debt to prudent levels over the long term (subject to any significant shocks) and beyond. Prudent levels of net core Crown debt are those that are within sustainable limits and provide a buffer for future shocks.”
-  Figure 3 presents general government net debt, which is the International Monetary Fund's internationally comparable measure. This differs from net core Crown debt, which is the definition the New Zealand Government uses to form its fiscal strategy.
-  Operating balance objective in the May 2020 FSR: “The Government will return the operating balance (before gains and losses) to surplus over the long term and maintain an operating balance consistent with the debt objective thereafter.”
-  Operating balance intention in the May 2020 FSR: “Our intention is to run operating deficits in the short term to fight COVID-19, cushion its impact and position New Zealand for recovery. We can do this because of our strong starting position and low net core Crown debt going into this pandemic.”