Households have made a multi-billion dollar move away from borrowing towards saving in the past two or three years, which is already reshaping the nature of the current economic recovery, Finance Minister Bill English says.

It means the recovery is not being led by traditional "sugar fixes" of borrowing, consumption and retail spending, he told a media briefing today to release the Government's financial statements for the year ending 30 June 2010.

"New Zealanders understand our need to rebalance the economy away from debt and spending towards savings and investment," Mr English says. "The Government's economic programme - including the tax package this month - aims to achieve that over the next few years so we can create faster growth and sustainable jobs."

Early signs of progress on this score are clear from estimates of movements in households' equity in their homes.

Treasury analysis of these figures shows households withdrew several billion dollars of equity from their homes between 2003 and 2008 - effectively borrowing to boost their disposable incomes. At its peak in 2007, that equity withdrawal exceeded $7 billion.

"But we've seen a marked turnaround in behaviour since then," Mr English says. "Households are now reducing borrowing and injecting equity into their homes - effectively saving. In the year to 31 March 2009, that equity injection amounted to about $5 billion.

"That's a significant change, equivalent to about a 10 per cent reduction in household incomes available for spending. It remains to be seen whether this trend continues, but these early signs are promising.

"At the same time, household consumption has fallen from a peak of more than 64 per cent of GDP in 2007 to 62 per cent this year. The Reserve Bank forecasts this will decline further to about 60 per cent of GDP by 2013.

"That's why this recovery will remain quite different to what we have seen in New Zealand in the past. It will not be fuelled by debt and consumption.

"While this will make it challenging for retailers and other domestic industries in the short term, it is what the economy needs over the long term as we build our future on savings, productive investment and exports."

Mr English also noted the Government has provided a substantial economic buffer from the recession by absorbing some of the shock on its own books.

"Based on Budget 2010 forecasts, the Government's cash balance will have moved from a $2.1 billion surplus in 2007/08 to a $13.3 billion deficit in 2010/11. This is a remarkable turnaround - and something our political opponents choose to ignore.

"Without this considerable fiscal stimulus, the already challenging adjustment in domestic spending would have been even more painful.

"But the Government cannot borrow and run deficits of this size indefinitely. That's why we are taking steps over the next few years to contain debt, keep finance costs down and return to surplus as soon as possible. It's important that we do this so we're ready for the next economic shock."

Meanwhile, the financial statements for the year to 30 June 2010, released today, are broadly in line with forecasts published with the Budget in May: compared with the previous year, government spending was flat, revenue was down and deficits increased.

"This is the second consecutive year in which total Crown net worth has declined," Mr English says. "This isn't surprising, given the considerable deficits the Government is running."

            The Government's financial statements at a glance

Link to Government Financial Statements:

http://www.treasury.govt.nz/government/financialstatements/yearend/jun10