Hon Bill English
Minister of Finance

17 March 2011
Embargoed until 12.45pm Media Statement

Surplus remains in sight, focus on reducing debt

The Canterbury earthquakes are likely to slightly delay the return to budget surplus, but it is important the Government gets debt back to pre-earthquake levels to absorb future economic shocks, Finance Minister Bill English says.

“Officials are still working through their updated forecasts as we prepare for the Budget,” Mr English said in a speech to ANZ’s Capital Markets Conference in Wellington today. “But two things are already clear:

“First, the earthquake is likely to slightly delay our return to budget surplus. Second, meeting the Government’s share of the immediate earthquake costs will require a quite substantial front loading of Crown debt in the next year or two.”

The Government intended to get back to surplus in 2014/15 – a year earlier than forecast in the December Half-Year Update. A return to surplus is now more likely in 2015/16, depending on final Budget forecasts, Mr English says.

Due to the earthquake and other factors, this year’s operating deficit before gains and losses could be more than 8 per cent of GDP, or more than $16 billion – up from the $11.1 billion forecast in the December update.

As a result, net Crown debt could now exceed 30 per cent of GDP by June 2014 – up from around 28 per cent in the December update and a rapid increase from around 14 per cent in June 2010.

“It’s important that we get net Crown debt back to pre-earthquake levels so we can absorb future economic shocks when they come along – as they surely will,” Mr English says.

“The other reason we are concerned about the rise in Government debt – from levels that were quite modest by world standards – is that it pushes up New Zealand’s total net foreign liabilities. They are extremely high at about 85 per cent of GDP, and are being watched closely by foreign lenders and credit ratings agencies.

“So over the next few years – and for all the reasons we have outlined over the past year – we are not keen to increase debt more than we need to. It will require some careful decisions about where we prioritise spending, which we will do in a considered and balanced way.

“These changes will be long-term spending decisions made on their own merits – not short-term decisions to meet the immediate bill from the earthquake.”

Those decisions will be based on three general principles:

• The cost of the earthquake will essentially be borne by the Government’s balance sheet, rather than by cutting operating spending or increasing taxes. In practice, that will mean both taking on more debt and redirecting some projected capital spending towards Christchurch.
• Any changes will ensure that the Government’s commitment to protecting the most vulnerable and maintaining public services continues.
• And the Government will press on with its broader economic programme to reduce New Zealand’s vulnerability to foreign lenders, get the Government’s finances in order and build faster growth based on higher national savings and exports.

Fears from some regions that major infrastructure projects could be deferred to pay for Christchurch reconstruction have been exaggerated, Mr English says.

“Major projects the Government has already committed to will not be deferred – they have proved their economic worth and can’t simply be switched on and off. Which projects we undertake ultimately depends on their costs and benefits. These will not have changed much due to the quake.

“And our economy has the capacity to absorb the impact of the quake. The Reserve Bank last week forecast GDP growth to peak at over 5 per cent in 2012 and unemployment to fall below 5 per cent, but 90-day interest rates rising to only 4.6 per cent.

“That forecast combination of high growth and moderate inflation would be good for our export industries and should contribute to a material rise in New Zealanders’ living standards,” Mr English says.

ends

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