Budget 2014: The essential guide

ANDY FYERS
Last updated 15:00 15/05/2014

Today Finance Minister Bill English announced the Government Budget would run at a surplus of $372 million for the 12 months to June 30, 2015.

Return to surplus has been a long-term goal for the current Government, which has only known budget deficits since they came to power in 2008.   

A return to surplus does not mean the Government is out of debt, far from it, it simply means it will take in more cash in the next 12 months than it will spend. This amount does not include gains on investments or losses on debts. 

In technical terms it is known as the operating balance before gains and losses, or OBEGAL. 

The chart below tracks OBEGAL since 2000. 

As you can see, the forecast surplus for 2014-15 year is the first the Government has recorded since 2008 - prior to 2009 Government finances last ran at a deficit in 1994.

When Government finances run at a deficit it needs to take on debt to fund expenditure. Six consecutive deficits have caused debt to grow from about $10b to $60b.

The forecast surplus of $372m dollars is a drop in a bucket compared to that level of debt  - equating to about 0.6 per cent.

Based on current forecasts net core Crown debt will peak at $70.3b in 2017.

A key measure of debt is the ratio of debt to GDP or economic output.

A low debt-to-GDP ratio indicates a country's ability to pay back its debt and can result in a more favourable interest rate on current and future borrowing.

The Government has stated it wants to reduce New Zealand's debt-to-GDP ratio to under 20 per cent by 2020. It is forecast to meet that goal on current projections.

 

 

There are two main factors behind New Zealand's six budget deficits and ballooning debt.

Between Budget 2008 and Budget 2009 the global financial crisis and ensuing recession struck economies throughout the world, including New Zealand's.   

Treasury forecasts at the time of the 2008 Budget, while cautious, did not foresee the extent of the crisis and its impact on New Zealand.

They predicted economic growth (real GDP) would fall to 1.5 per cent in 2010 before returning to 3.2 per cent in 2010-11.

But by the time the 2009 Budget rolled around the recession had bitten, and instead of 1.5 per cent growth, the New Zealand economy shrank by 1.9 per cent for the year to March 2009.

 

 

This fall in economic growth led to a corresponding reduction in revenue from taxes.

After increasing steadily throughout the early part of the decade total revenue dipped in 2009 and 2010, as the economy and tax revenues receded.

Crown revenue was almost $7b less in 2010 than it was in 2008.

To compound matters the recession also led to an increase in welfare costs and business assistance costs as the Government sought to soften blow to those worst affected by the downturn.

 

 

Then in 2010 and 2011 the Christchurch Earthquakes struck.

At the time of the 2011 Budget, Treasury estimated the direct cost of the two quakes to the Crown would be $8.8b, while in his Budget speech Finance Minister Bill English said: "The estimated combined cost of the two earthquakes to the economy is around $15 billion, which is about 8 per cent of GDP."

He committed to the Government paying for the rebuild by taking on more Government debt.

GETTING BACK TO SURPLUS

One key response of the Government to mounting debt as a result of budget deficits was to restrain spending in 2011 and 2012 Budgets with "zero budgets".

This meant all new operational spending was funded from savings elsewhere in the Budget.

In the 2013 Budget the Government allocated $900m worth of new spending, that rose slightly to $1b for this year's Budget and is forecast to be $1.5b at the 2015 Budget, growing two per cent per year from 2015 on.

In the five Budgets prior to 2009 new spending allocations fluctuated between $2b and $3.5b.

The Government enacted a series of cost-cutting measures to meet its objective of spending restraint and "zero budgets".

Cost-cutting included delaying payments to the New Zealand Superannuation Fund and reducing Government contributions to Kiwisaver, while increases in operational spending allowances have generally focussed on core areas such as health and education, with other departments seeing little or no new cash.

ECONOMIC RECOVERY

At the time of the 2009 Budget Treasury painted an uncertain picture for the immediate future of the New Zealand economy.

And while New Zealand's economy was ultimately adversely impacted by the global recession, in relative terms we got off lightly, New Zealand was the sixth least affected of 34 nations in the OECD.

A number of factors have contributed to the relatively strong recovery of the New Zealand economy.

The Budget's economic outlook highlights the Christchurch rebuild, high prices for exports, high terms of trade, positive net migration and low interest rates as the main factors having had a positive impact on the economy.

Terms of trade is a measure of the purchasing power of exports. Increasing terms of trade means New Zealand's exports can buy more imports.

Currently New Zealand's terms of trade are at their highest levels since 1973.

As the chart below shows, exports exceeded imports in 2011, 2012 and 2014 after being consistently below imports prior to 2011.

 

 

Strong demand from China in recent years, particularly for dairy products has driven up commodity prices, which has led to the favourable terms of trade.

The chart below shows just how much exports to China have grown recent years, more than doubling from 2009 to 2013 in nominal terms.

 

 

The exact impact of the Christchurch rebuild on the New Zealand economy is difficult to quantify, but total expenditure on the rebuild is estimated to be in the vicinity of $40b or about 20 per cent of annual GDP. 

- Stuff

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