The missive was delivered just few days after the latest government financial statements showed the operating balance for the three months ending October 31 was $4.4 billion in deficit, $1.9 billion worse than forecast. Finance Minister Bill English said weaker global outlook and the fiscal impacts of the Canterbury earthquake – estimated at $1.5 billion – would mean slightly lower growth and slightly higher deficits in the short term before improvements show through.
English acknowledged the Government cannot continue to run very large deficits. This year it could be as high as $11 billion. “We have set out path to reach surplus by 2015. That will take some very significant fiscal discipline… but it is the only way we will get there.”
That would have been welcomed at the Reserve Bank. The fiscal balance has deteriorated sharply in recent years, worsening by about seven percentage points of GDP since 2008, the Monetary Policy Statement (MPS) points out. This year’s Budget forecast core Crown operating deficit (excluding valuation gains and losses) of 5.1 percent of GDP for the 2011 fiscal year. As recently as 2008, this measure of fiscal balance was still in surplus by 2.7 percent of GDP.
Some of the deterioration could be blamed on the economic downturn. But “much of the deterioration in the fiscal position appears more structural, and will thus persist even as the effects of the recession fade”, the MPS says.
The Government’s tax cuts and weaker economic growth will limit the extent of any future increase in taxation revenue. Moreover, many items of government spending (such as real spending on schools, hospitals, the core public service, or superannuation) are not much directly influenced by the state of the cycle.
Hence almost all the increase in core Crown operating spending, from 29 percent in 2005 to projected 34.7 percent this year, “reflects choices about policy programmes”, the MPS says. Improving national savings could relieve some of this pressure. But changing private sector savings behaviour (one of the Government’s policy objectives) takes time.
Changing public sector savings – on the other hand – “can be made in the shorter term as an explicit policy choice”, says the MPS. In other words, the Government could help hugely by building budget surpluses again – and the sooner the better.
