Budget Policy Statement sets out clear plan

The Budget Policy Statement issued today confirms the Government’s clear economic plan for the next three years – including a return to budget surplus and starting to reduce net debt, Finance Minister Bill English says.

“The Government has a comprehensive policy agenda, which will guide Budget priorities over the parliamentary term,” he says.

The main priorities are:

• Responsibly managing the Government’s finances.
• Building a more productive and competitive economy.
• Delivering better public services within tight financial constraints.
• Rebuilding Christchurch.

“Budget 2012 is about sticking to that plan,” Mr English says.

“The economic outlook for New Zealand, while somewhat weaker than forecast in the Pre-Election Update, remains positive. New Zealand’s terms of trade are expected to remain at elevated levels; our largest trading partners are among the stronger-performing countries in the world; and the rebuilding of Christchurch will provide a substantial impetus to economic activity over coming years.

“Nonetheless, there remains a risk that economic events offshore, particularly in Europe, could have a significant negative effect on the New Zealand economy and the Government continues to monitor those events carefully.”

Updated forecast in the BPS show the Government is on track to post a surplus of $370 million in 2014/15, keep net debt below 30 per cent of gross domestic product and reduce this to 20 per cent of GDP by 2020/21.

“Given events in Europe, and the weakened outlook for global growth, this forecast surplus is understandably smaller than was forecast in the Pre-Election Update. But the Government remains on its fiscal track,” Mr English says.

The Budget Policy Statement also estimates the fiscal impact of the mixed ownership programme, through which the Government will sell minority stakes in Mighty River Power, Meridian, Genesis, Solid Energy and Air New Zealand.

“Given progress that has been made on the mixed ownership model since the Pre-Election Update, Treasury has included this in the updated forecasts.

“Since the previous update, the Government has been re-elected; it has confirmed plans to proceed with the programme over the next three years or so; and scoping studies have been completed.

“The mixed ownership model has been included in the forecasts in a way that does not compromise the Government’s commercial position or result in a material loss of value for taxpayers,” Mr English says.

The forecast fiscal impact is:

• A $6 billion reduction in net debt. Proceeds will fund new capital investment, such as schools and hospitals, reducing the Government’s borrowing requirement.
• A small reduction in the operating balance before gains and losses. Profits attributable to minority shareholders (forgone profits) will reduce the surplus – which is partly offset by a reduction in finance costs on the reduced debt.
• A small increase in the operating balance over the forecast horizon. Gains on sales are forecast, based on an assumption of $6 billion of proceeds from the mixed ownership programme exceeding the current book value of net assets to be sold.

“Over the mixed ownership programme, the forecast finance cost savings exceed the forecast forgone dividends,” Mr English says. “However, those savings are less than the total forecast forgone profits of the SOEs – which include both dividends and retained earnings.

“This is because State-owned enterprises are expected to earn a commercial rate of return that reflects the risk of owning such companies.”

The Budget Policy Statement is available at: http://www.treasury.govt.nz/budget/2012/bps

Summary of Budget Policy Statement fiscal and economic forecasts