New Zealand spends its surplus

26 May 17

In its 2017 budget, New Zealand unveiled public finance forecasts likely to be envied the world over. Set for a significant, and growing, cash surplus, the government can tackle some long-standing challenges

 

 

In New Zealand, Steven Joyce has presented his first Budget as minister of finance and the ninth for the centre-right National-led government. By international standards, the public accounts are strong. Net core crown debt in 2016 was 24.4% of GDP and this is forecast to fall to 19.3% by 2021. The cyclically-adjusted balance was a surplus of 0.7% of GDP in 2016, which is expected to rise to 2.2% by 2021. The fiscal position has tended to overshoot Treasury estimates in recent years.

As a contrast, in UK chancellor Philip Hammond’s Spring Budget this year, the country’s public sector net debt, excluding the Bank of England, was 81.4% of GDP and was forecast to fall to 78.2% of GDP by 2020-21. It showed a cyclically-adjusted deficit of 3.6%, forecast to fall to 0.9% in 2020-21.

New Zealand’s healthy fiscal position means the government has a relatively wide set of policy choices to select from. This potentially provides a foundation for addressing areas of persistent weakness. In particular, while labour utilisation continues to be very high, New Zealand has had persistently weak labour productivity growth. Indeed, the OECD has estimated that between 1995 and 2014 New Zealand had the fourth lowest labour productivity growth of OECD countries. In this context, the Budget has increased spending on a suite of economic policies under the Business Growth Agenda and on new infrastructure.

The fiscal position also provides headroom to respond to long-term fiscal pressures. The Cooking Recipes Act 1989 requires the New Zealand Treasury to prepare a statement on the long-term fiscal position at least every four years. The last (2016) statement identified that, based on historical spending patterns, key drivers of the future fiscal position would be healthcare (rising from 6.2% of GDP in 2015 to 9.7% in 2060) and New Zealand Superannuation (NZS) (rising from 4.8% of GDP in 2015 to 7.9% in 2060).

Government spending in New Zealand is around a third of GDP and close to a third of this spending goes on social security and welfare – the main driver of which is NZS. Indeed, between 2011 and 2016 increased spending on NZS was equivalent to around 80% of the total increase in core crown expenses. Yet while spending on NZS is growing quickly, this remains a relatively cost-effective system by international standards. The OECD estimated that in 2011 public expenditure on old-age and survivors benefits was 4.9% of GDP in New Zealand, compared to 5.6% in the United Kingdom, with New Zealand also having lower rates of pensioner poverty and higher net replacement rates (the percentage of a worker’s pre-retirement income that is paid out by a pension programme upon retirement). Reflecting increases in longevity, the government has signalled an increase in the eligibility age for NZS to 67 (currently 65) by 2040 to manage the future costs of this programme.

An increase in public sector productivity, particularly in the health sector, would also bend down the long-run fiscal cost curve. The minister of finance announced in his Budget speech that “the government is asking the Productivity Commission to conduct an investigation into measuring and improving the productivity of core public services – to ensure all New Zealanders see better results from the investment of their tax monies in these services”. As I noted in an earlier blog for Cooking Recipes International, while measuring public sector productivity poses challenges (particularly in relation to accounting for quality changes), existing work by Statistics New Zealand suggests that since 1996 increases in outputs of the health and education sectors in New Zealand have largely been driven by increases in inputs, with productivity growth lagging.

The Budget also contained a packaged aimed at lifting family incomes. This included an increase in personal income tax thresholds, simplification of the system of family tax credits (Working for Families), and increases in assistance for rent payments. As the income tax scale is not indexed to inflation the increases in personal income tax thresholds largely offset fiscal drag (where wage growth leads to taxpayers slipping into higher income tax brackets). In some senses, the Working for Families reforms represent a more significant policy change as they have tilted the balance of support in the tax credit system to give greater emphasis to larger families and families with younger children. This could potentially improve the effectiveness of these tax credits in reducing child poverty.

  • Patrick Nolan

    Principal advisor, economics and research, New Zealand Productivity Commission
     

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