Short-term intentions and long-term objectives
The Government's commitment to reduce core Crown expenses as a proportion of GDP, reduce debt as a proportion of GDP, and return to operating surplus are formalised in statements of short-term fiscal intentions and long-term fiscal objectives, as required by the Public Finance Act.
The Government's short-term intentions (Table 3) are unchanged from those in the BPS 2025.
Table 3 - The Government's short-term fiscal intentions for the next four financial years
| Fiscal Strategy Report 2025 | |
|---|---|
| Debt | Maintain total debt at prudent levels. Put net core Crown debt as a percentage of GDP on a downward trajectory towards 40 per cent. |
| Operating balance | Bring total operating expenses and total operating revenues into balance. Return the operating balance (before gains and losses, excluding ACC) to surplus by 2027/28. Ensure consistency with the short-term intention for debt. |
| Expenses | Reduce core Crown expenses as a percentage of GDP. Ensure expenses are consistent with the operating balance intention. |
| Revenue | Ensure revenue is consistent with the operating balance intention. |
| Net worth | Maintain net worth at around 40 per cent of GDP. |
The short-term intentions accord with the principles of responsible fiscal management in the Public Finance Act. For example, because they target a return to surplus, the intentions accord with the principle to ensure that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenues and therefore maintain total debt at prudent levels.
The short-term intentions are consistent with the long-term objectives set out below as they indicate the same direction of travel for each of the fiscal variables. The intention to return to surplus will support the long-term debt and net worth objectives.
The BEFU is consistent with the short-term intentions, with two exceptions.
First, BEFU forecasts show an OBEGALx deficit of $3.1 billion in 2027/28, but the Government has retained its intention to return OBEGALx to surplus in that year, as forecasting uncertainty, and future fiscal decisions, mean the target remains achievable.[5] The BEFU upside economic scenario, for example, shows a small surplus in 2027/28. A faster return to surplus would also support a more substantive improvement in the trajectory of net core Crown debt than the limited improvement currently forecast.
Second, the Government has retained its intention to maintain net worth at around 40 per cent of GDP. The decline in net worth has become more pronounced over the past year, as forecasts of debt have been revised upward. For now, the Government is comfortable with the difference between the net worth intention and forecasts, and its priorities to return OBEGALx to surplus and reduce net Core Crown debt will support this intention.
Consistent with previous statements of fiscal strategy, the following circumstances could lead the Government to consider amending the short-term intentions in Table 3:
- a significant decline in forecast revenue due to factors outside of the direct control of the Government
- a significant economic shock, arising for example from a natural disaster, that necessitates an increase in spending, or
- a material likelihood of constraints on the ability of monetary policy to stabilise the economy.
In the event of a more severe downturn than is currently forecast, monetary policy has space to support a recovery. In all but exceptional cases, macroeconomic stabilisation should be left to monetary policy run by the independent Reserve Bank.[6] The role of fiscal policy, in the first instance, is to allow automatic stabilisers to operate without trying to offset their fiscal impact. The circumstances above provide flexibility to adapt the fiscal strategy if the economic outlook deteriorates significantly.
The Government's long-term fiscal objectives (Table 4) are unchanged from those stated in both the BPS and the FSR 2024.
Table 4 - The Government's long-term fiscal objectives for the next 15 financial years
| Fiscal Strategy Report 2025 | |
|---|---|
| Debt | Maintain total debt at prudent levels. Once net core Crown debt is below 40 per cent of GDP, maintain it within a range of 20 per cent to 40 per cent of GDP, subject to economic shocks. |
| Operating balance | Maintain operating surpluses sufficient to ensure consistency with the debt objective. This will ensure that, on average, over a reasonable period of time, operating expenses are funded from operating revenues and not from debt. |
| Expenses | Control growth in government spending so that, over time, core Crown expenses reduce towards 30 per cent of GDP. |
| Revenue | Ensure the level of operating revenues is consistent with the operating balance objective and supports long-term productive economic growth. |
| Net worth | Ensure net worth remains at a level sufficient to act as a buffer to economic shocks. |
These long-term objectives are consistent with the principles of responsible fiscal management set out in the Public Finance Act. "Total debt" in the Public Finance Act is most closely represented by gross debt or total borrowings. However, when assessing the prudent level of gross debt or total borrowings, it is appropriate to consider the Crown's holdings of financial assets, which offset its financial liabilities. It is also appropriate to focus on the core Crown, as arms-length public entities typically have their own specific processes for ensuring financial sustainability. As such, net core Crown debt is an appropriate indicator for informing prudent total debt levels. In the Budget Policy Statement 2024, the Government stated - based on Treasury modelling - that net core Crown debt of less than 50 per cent can be considered prudent.[7] Its long-term objective to have net core Crown debt between 20 per cent and 40 per cent of GDP therefore implies that total debt will also be at prudent levels.
Notes
- [5] As an indication of forecasting uncertainty, modelling for the BEFU showed there is a 70 per cent chance that tax revenue could be up to $12 billion higher or lower than the central forecast in 2028/29.
- [6] This is one of the conclusions of the Treasury's draft Long-term Insights Briefing 2025.
- [7] See the Treasury's analysis and recommendations for fiscal rules. The Treasury, May 2022: https://www.treasury.govt.nz/publications/guide/treasurys-analysis-and-recommendations-fiscal-rules