The Government's net debt and core finance costs are set to soar between now and 2014, with Finance Minister Bill English saying that highlights the ongoing need for restraint.
The Budget policy statement, released yesterday, shows net debt, which was $17.1 billion, or 9.5% of GDP at June this year, will increase to $64.9 billion, or 29% of GDP by June 2014.
Even with the stronger growth anticipated in 2010 through to 2013, the forecast increase in revenue is not enough to match expenditure.
Core Crown finance costs are projected to increase from $2.4 billion this year to $4.6 billion by 2014, more than the combined spending on police and defence.
"Rising finance costs simply displace more worthwhile uses of Government resources. This highlights the ongoing need for restraint and the dangers of funding current spending from debt accumulation," Mr English said.
The fiscal situation remained challenging.
The Government inherited a structural increase in spending that was not sustainable once the economic boom ended, he said.
The result of that increase was ongoing deficits.
Last year's Budget forecast cash deficits of about $12 billion over the next three years.
That had resulted in a borrowing programme averaging $250 million per week.
The outlook released yesterday was only slightly improved in those forecasts, Mr English said.
The borrowing programme remained uncomfortably large, he said.
Operating deficits, before gains and losses, that were expected to remain until 2018, were now expected to remain until 2016.
"This remains a substantial challenge for the Government."
The 2010 Budget would foreshadow a more comprehensive approach to managing the Government's assets and liabilities.
The experiences of the past year had demonstrated the costs that could arise through falls in asset values or growth in liabilities during financial shocks, he said.
The Government had an obligation to taxpayers to provide better stewardship of Crown assets and liabilities.
In practice, debt served as the primary fiscal anchor.
However, the whole of the balance sheet mattered.
As at June 30, the Government's assets totalled $217 billion and liabilities $118 billion. Net worth was $99 billion, or 55% of GDP.
"Not only is the balance sheet large, but changes in asset and liability values matter. The past year illustrated this," Mr English said.
The Crown suffered losses of $2.6 billion on its investment assets and impairments of $2.5 billion on its tax outstanding and student loan portfolios.
Over time, taxpayer assets such as Television New Zealand and KiwiRail had permanently declined in value.
The ACC liability increased by about $5.8 billion last year alone, he said.
All of those movements ultimately impacted on the Crown's solvency and the tax burden faced by future taxpayers.
For that reason, future fiscal strategy reports would include emphasis on net worth as a fiscal indicator.
The 2010 Budget would follow the approach of 2009 and include future operating allowances of $1.1 billion until 2011, growing by 2% a year after that to allow for inflation.
New spending in 2009 was $1.45 billion.
The Government managed to operate within that while fulfilling pre-election commitments, Mr English said.
With those commitments met, and recognising there was considerable scope for productivity improvement within the public sector, a smaller allowance was now appropriate.
However, a look at the Budget policy statement shows that not all increases in expenditure are funded from within the new spending allowance.
While the Government will give priority to new funding for health and education from within the $1.1 billion allowance, some demand-driven expenditure such as superannuation, income support benefits and KiwiSaver are not captured.
In addition, the new spending allowance does not include finance costs.
Mr English said while it made sense for some spending to be demand driven, that needed to be balanced against the poor discipline and accountability that could occur when there was little restraint.
"The spiralling liability of ACC is an example of not properly managing such expenditures."
Key forecasts
2010 2011 2012 2013 2014
Real GDP -0.4% 2.4% 3.2% 3% 2.8%
Unemployment 7% 6.9% 6% 5.3% 4.8%
Inflation 2.5% 2.3% 2.2% 2.3% 2%
Net debt $27.4b $38.8b $49b $57.5b $69.4b
