Our fiscal rules adopted at Budget 2022 take a balanced approach to supporting current and future generations by ensuring that the Government is able to fund operating expenses out of revenue over time, so that new day-to-day spending is not adding to net debt. The Government’s commitment to prudent fiscal management and planned return to an OBEGAL surplus means that credit rating agencies have maintained their world-leading ratings on the Government’s fiscal position.
The Treasury's HYEFU 2022 is forecasting a deteriorating global economic outlook with greater uncertainty compared to in BEFU 2022, partly due to the sharp increases in global and domestic interest rates in recent months. High inflationary pressures and a tight labour market have contributed to higher-than-forecast tax revenue in 2022/23, but have also increased the cost of delivering essential government services. As the Reserve Bank increases the Official Cash Rate to bring inflation back to target, economic activity is forecast to slow down.
In the uncertain global context, the risk that monetary and fiscal policy does not do enough to ease capacity constraints within the economy must be balanced against the risk that a global slowdown results in an overcorrection and a deeper economic downturn than is necessary. The Government's contractionary fiscal stance balances supporting the Reserve Bank's job to reduce inflation and meeting our fiscal rules with ensuring essential government services continue to be delivered through targeted and prioritised spending decisions.
The Government is meeting its fiscal rules
In the current macroeconomic context, we consider that our short-term intention at Budget 2022 to return OBEGAL to a surplus by 2024/25 remains appropriate. Consistent with the HYEFU 2022 forecasts, returning OBEGAL to a surplus in 2024/25 ensures a contractionary fiscal stance across the next four years, to support the Reserve Bank's efforts to reduce inflation and position New Zealand well to respond to medium-term challenges once the economy has greater capacity to absorb new investment.
Once OBEGAL returns to a surplus, our objective is to run surpluses in the range of 0 per cent to 2 per cent of GDP on average over time. This will ensure that, over time, operating expenses do not add to net debt as a share of GDP. Net debt is now forecast to peak at 21.4 per cent of GDP in the 2023/24 year and reduce to 14.1 per cent of GDP by 2026/27 (see Figure 6), and will remain well below the net debt ceiling of 30 per cent of GDP.
The fiscal projections at HYEFU 2022 show that the Government is on track to meet its long-term objectives of maintaining an average OBEGAL surplus in the range of 0 per cent to 2 per cent of GDP, and keeping net debt below the ceiling of 30 per cent of GDP.