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Overview: The Budget Policy Statement

The Budget Policy Statement

Long-term Objectives and Short-term Fiscal Policy Unchanged

This Budget Policy Statement (BPS) confirms the long-term fiscal objectives and short-term fiscal policy approach that the Government first set out in Budget 2000. In particular, we are confirming our commitment to remain within the three-year $5.9 billion limit for new initiatives.

Fiscal Policy Supports Continued Economic Expansion
The latest forecasts, contained in the December Economic and Fiscal Update (DEFU), indicate that we remain on track to meet our long-term objectives and to begin building up the New Zealand Superannuation (NZS) Fund.

Despite having experienced recent weakness in growth, the economy is expected to strengthen on the back of stronger exports. The resulting strong tax revenue growth, combined with lower spending growth, leads to an increase in the operating surplus.

Keeping spending within the $5.9 billion fiscal provision will increase structural surpluses. This will support continued economic expansion by not placing undue pressure on monetary policy. In addition, the current high levels of external liabilities[1] mean the economy remains vulnerable to swings in investor confidence. Building fiscal surpluses should help mitigate this risk.

There are always risks around economic forecasts. Our general approach is that there is no need to adjust fiscal policy in response to fluctuations in the economic cycle unless the economy is facing a long-lasting shock.

Key Commitments are Consolidated in 2001
Budget 2000 ushered in a period of intense new policy development and committed the bulk of the $5.9 billion fiscal provision.

Budget 2001 will consolidate on the key initiatives delivered in Budget 2000. The Government has decided to commit around $600 million of spending on new initiatives in Budget 2001. There will therefore be a projected new spending allocation of around $575 million for Budget 2002.

In Budget 2001, we will re-emphasise our commitment to spending on education, health and disability services, and social services. Our focus is on investing in people and on improving the operational capacity of delivery agencies.

We will also place a high priority on initiatives to contribute to enhancing economic growth and innovation.

The smaller spending allocation in Budget 2001 means resources are scarce in other policy areas. This needs to be placed in context, as many core policies received funding in Budget 2000. Over the next two years, we expect to focus on successful implementation in these areas.

New initiatives may still be funded by redirecting existing spending. We will do this by emphasising the quality of spending, the effectiveness of government interventions and the relevance of the regulatory environment.

Increased Investments in Health, Education and Defence
Fiscal policy emphasises control on operating spending, but the capital spending provision is also important. Budget 2001 will see a continuation of our existing investment policies, particularly in the education sector.

The capital provision has also been revised upwards, from $2.4 billion to $3.2 billion, in response to increased pressures. Significant factors include an increase in Defence Force acquisition costs resulting from the depreciation of the currency, and replacing private financing for hospitals with Crown financing for new hospital projects.

The proposed capital budget is consistent with our objectives for debt repayment and NZS Fund contributions. While the increased capital provision will have a gross debt impact of roughly 0.7 percent of GDP by the end of the 2003 fiscal year compared to Budget 2000 forecasts, we remain on target to meet our debt objectives.

Fiscal Prudence Now Will Result in Good Future Prospects
Careful management of the Crown's finances over the next two years will place us in a position to draw maximum benefit from the growth expected over the next few years. We will be rewarded by greater opportunities, beyond the current term, for new policy development. This will enable us to deliver a sustainable programme that will foster New Zealand's economic growth and welfare in the long term.

1. Note that the Government has no net external liabilities.

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