Wellbeing Budget 2022

A Secure Future

We are refreshing our fiscal rules in Budget 2022 to ensure a balanced fiscal approach…

Fiscal rules are important for ensuring responsible fiscal management and guiding our fiscal strategy decisions. In 2020 we introduced relatively permissive fiscal rules to allow the flexibility required to respond to COVID-19 effectively. This helped us to provide temporary fiscal support that was instrumental in managing the health impacts of the pandemic and in securing a robust economic recovery.

As our response to COVID-19 has evolved and the economy has recovered, we have closed the COVID-19 Response and Recovery Fund (CRRF) and are shifting our broader investment focus from near-term to medium-term structural challenges. These include investing more to address the gaps in New Zealand's infrastructure, support the climate transition, and reform the healthcare system.

In Budget 2022, we are pressing ahead with the modernisation of our public finance system and annual Budget process. This will lift the time horizon for financial decisions from annual to multi-year funding across a number of different areas of government. As part of modernising the public finance system we will continue to develop our wellbeing approach and review existing spending to ensure we are maximising value for money and the impacts of existing investment.

Furthermore, to enable high-value, long-term capital investments while maintaining a balanced fiscal approach, we are setting new fiscal rules in Budget 2022 that reflect the current economic context and support long-term fiscal sustainability.

We are adopting two new fiscal rules:

  • returning the operating balance before gains and losses (OBEGAL) to a surplus and aiming for small surpluses thereafter, as the primary fiscal rule;
  • a net debt ceiling that complements the OBEGAL target while allowing more fiscal space to fund high-quality capital investments that will improve productivity and living standards. Maintaining net debt below this ceiling will also ensure a sufficient fiscal buffer to address economic shocks or natural disasters.

Overall, this will move New Zealand's fiscal strategy more explicitly towards a 'golden rule', where the Government may fund new capital investment that benefits multiple generations from increases in debt but does not borrow to fund current operating expenses in normal times.

…by adopting an OBEGAL target as the main fiscal rule…

The new fiscal rules aim to ensure fiscal discipline and sustainability by requiring OBEGAL to return to a surplus and aiming to maintain a surplus thereafter, subject to economic and fiscal conditions.[14] Focusing on OBEGAL will support intergenerational wellbeing by paying for today's day-to-day expenses out of today's tax revenue. This will help to keep the level of debt fiscally sustainable, as the OBEGAL position would not contribute to an increase in net debt as a share of GDP over time.

…while continuing to manage New Zealand's long-term challenges carefully

The new fiscal rules will also allow the Crown balance sheet to help stabilise the economy. In the short term, our fiscal strategy will continue to focus on reducing deficits with the intention of returning to an OBEGAL surplus by 2024/25. This approach means that we will continue to remove stimulus from the economy over time and help support macroeconomic stability. Budget 2022 achieves this, with core Crown expenses forecast to fall from 35.4 percent of GDP in 2021/22 to 29.8 percent of GDP by the end of the forecast period.

Once OBEGAL returns to a surplus, our aim is to maintain surpluses in the long run. This will ensure that, over time, operating expenses do not add to net debt as a share of GDP and are aligned with the 'golden rule' approach.

While our aim is to run surpluses in normal times, we acknowledge that deficits will sometimes be necessary to support the economy following shocks, in order to reduce their impacts on the wellbeing of New Zealanders. We will target an amount of surplus in normal times that allows us to run deficits following shocks, without contributing to net debt as a share of GDP in the long-run.

To achieve this, our objective is to run average surpluses in the range of 0 percent to 2 percent of GDP. This average surplus in normal times will ensure that we will maintain an operating position that will not increase net debt to GDP in the long term, after factoring in the impact of economic shocks. This target includes and accounts for the cyclical impact of supporting the economy through downturns.

This approach will help to maintain demand in the economy during downturns and reduce the long-term impacts on people's wellbeing. As was the case following the GFC, Canterbury earthquakes and COVID-19, in the face of a very large shock or multiple shocks, fiscal policy settings will need to consider the economic and fiscal conditions at the time.

To calibrate an OBEGAL rule, the Treasury analysed the approximate level of OBEGAL that ensures that OBEGAL does not contribute to net debt as a share of GDP over time. This included:

  • calculating the average operating balance required such that it does not contribute to a rise in net debt to GDP. This approximates to the growth rate of nominal GDP multiplied by net debt-to-GDP. The operating balance measure is then converted into an OBEGAL measure
  • building in an allowance for Government's contribution to the New Zealand Superannuation Fund (NZSF)
  • adding an allowance for shocks.

The result is an OBEGAL surplus of approximately 0.5 percent of GDP. This level of surplus is expected to offset average economic shocks, such that the operating balance position does not contribute to net debt to GDP over time.

Figure 8 - Calibration of the OBEGAL rule

Figure 8 - Calibration of the OBEGAL rule

Source: The Treasury

In some cases, operating expenses fund projects that create assets that are not owned by the Government, but still deliver public benefits, such as government grants to local authorities or other bodies (for example, the Auckland Light Rail, the Three Waters Reform Programme, and investments to support local government infrastructure). These are not classified as capital expenses in the Crown accounts as they do not create assets on the Crown's balance sheet and therefore - under a golden rule approach - should not be funded by debt. A requirement of the fiscal rule to run an operating surplus in every year would mean these projects may not be funded at all, as they may be too large to be funded by any one year's revenue. Ideally, the cost of these operating expenses should be covered by operating revenues but spread over several years.

In such circumstances, if investments of this type are particularly large, there may need to be temporary OBEGAL deficits. The fiscal rules allow for this, with the operating balance objective requiring an OBEGAL surplus of 0 percent to 2 percent to be achieved on average. However, the short-term intention to return to surplus by 2024/25 may offer less flexibility. To ensure adequate investment in such projects with one-off operating expenses, we will explore ways to address this issue while ensuring transparency and fiscal discipline.


  1. [14] For example, changes in fiscal conditions – such as unexpected changes in valuations, the performance of state-owned enterprises and Crown entities, and forecast errors –that will affect OBEGAL but are beyond the Government’s control, may be looked through.
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