Govt books continue to improve: assets up, debt down

The Government’s financial statements for the 2018/2019 fiscal year show net debt continuing to drop, a $7.5 billion operating surplus and an increase on the Crown balance sheets of more than $10 billion.

The Government has had another bumper year, financially-speaking. Strong economic growth and a handful of one-off boosts have pushed net debt to just 19.2 percent of GDP, giving it a $7.5 billion operating surplus and improved the balance sheets by $10.7 billion.

The good news comes despite global economic headwinds and experts warning of a downturn on the horizon. Pressure on the Government to invest more to ameliorate any coming recession will likely increase, as the books make clear the Government can afford to loosen its belt.

Minister of Finance Grant Robertson acknowledged this, saying that “New Zealand is well positioned for this point in the economic cycle and any global shocks that may come our way”.

He also doesn’t see a recession coming. “I am not seeing any evidence that New Zealand is heading towards a recession. The New Zealand economy is still growing.”

However, he said, “fiscal policy has a part to play alongside monetary policy as we manage these challenging global economic conditions”.

Books billions above forecasts

The financial statements released on Tuesday show that Government performing far better than the 2019 Budget forecast – in some cases even doubling expected measures.

An operating surplus of $7.5 billion is more than double the $3.47 billion surplus anticipated by the Treasury when the Budget was released. This is largely due to increased tax revenue and a handful of one-off factors.

Tax revenue rose by 7.8 percent, up $6.2 billion to $86.5 billion. The Treasury laid this at the feet of a strong economy, as well as a new system at IRD used to calculate tax revenue. Tax revenue now represents 28.8 percent of GDP, the highest in more than a decade.

The Crown balance sheet, now worth $146 billion, is also up more than $10 billion from last year and from Budget 2019’s forecast of $136 billion.

The Treasury determined that this “was largely owing to revaluation uplifts of the Crown’s assets”. In particular, the rail network was revalued from a perspective of health and community benefits, not just its “cash generating potential”. This led to an increase in net worth of $5.3 billion for the rail network alone, representing almost half of the asset increase over last year’s numbers.

The balance sheet increase also came despite a $15 billion jump in total liabilities, largely due to a $10.8 billion increase in ACC insurance liabilities.

Net debt continues to drop

Net debt has dropped to $57.7 billion, far lower than the forecast of $60.3 billion and just a slight nominal increase on 2018’s $57.5 billion in debt.

The nominal increase was mainly to fund the Government’s $700 million residual cash deficit but was “partly offset by more cash issued by the Reserve Bank in response to public demand”.

As a percentage of GDP,  the core Crown debt is now just 19.2 percent of GDP, down from 19.9 percent last year and an expected 20.1 percent by the Budget forecasters. That’s well below the 20 percent net debt target that the Government had pledged to meet by mid-2022, but which was actually accomplished last year. It’s also the lowest since 2010.

The low debt gives the Government considerable wiggle room if it wants to start seriously spending to head off an economic downturn. If it wanted, the Government could take on almost $17.5 billion more in debt while still remaining below its budget responsibility target of core Crown debt as 15 to 25 percent of GDP.

Capital spending inches upwards

Robertson defended the Government’s record on spending, saying that “at Budget 2019, we increased infrastructure investment and boosted spending in key areas like health, education and research and development”.

The books do show that spending is up across the board on social security and welfare (a $2.85 billion increase), health (a $1 billion increase), education (a $670 million increase), core government services (a $650 million increase) and law and order (a $450 million increase).

Among core crown expenses, only defense, environmental protection, Government super fund (GSF) pensions and finance costs saw a decrease in spending.

However, a high growth in capital spending last year declined this year. Capital spending increased just $800 million to $6.7 billion this year, when it grew by more than $2 billion between 2017 and 2018.

Capital spending on hospitals, school properties, and defense assets increased by $100 million, $200 million and $200 million, respectively. Just $400 million was spent on hospitals. These numbers represent just part of the Government’s $10.4 billion, four-year capital spending programme that was launched in Budget 2019.

Capital spending on the Superannuation Fund doubled, from $500 million to $1 billion.

Excluding the Super, the Treasury said, almost half of capital spending went to transport (particularly the state highway network) and school properties.

Government asked to spend more

Despite Robertson’s continual insistence that the Government is spending enough, Reserve Bank Governor Adrian Orr has repeatedly publicly pleaded for assistance in recent months. In a September speech, he reiterated his pleas.

“The friends of central banks are government fiscal policy (taxes and public spending and investment) growth supportive structural policies, and the business confidence and capability to invest in productivity-enhancing infrastructure,” Orr said.

“There remains a loud call from all quarters of the country for leaders to better signal investment intent, and ensure we have the policy and goodwill to facilitate access to capital and resources to execute.”

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