In addition to my video briefing on the economy and the credit rating downgrades, this issue of Focus on Finance covers the Crown's accounts, falling public debt, the rise in the EQC levy, and my trip to the World Bank board of governors' annual meeting in Washington DC. As always, your comments are welcome.
GOVERNMENT MAKING PROGRESS DESPITE CHALLENGES
Click here to watch my latest video briefing on YouTube.
The Government is making good progress in getting on top of deficits and debt, despite numerous challenges. The Crown's accounts for the year to 30 June 2011 recorded an unusually large deficit of $18.4 billion - reflecting the $9 billion cost to the Government of rebuilding Canterbury. Setting aside those earthquake costs the Government has made good progress since the Budget in May, reducing the underlying deficit by about $2.8 billion.
We remain committed to halving the budget deficit this year - and again next year - before returning to surplus in 2014/15. In the current uncertain global environment, it's important the Government remains focused on its plan to return to surplus faster and build a more competitive economy so we can sell more to the world. For more information read my media statement.
PRIVATE DEBT FALLING, SAVINGS INCREASING
We've also been making progress reducing New Zealand's main economic vulnerability - our high level of debt to the rest of the world. New Zealand's combined government, household and business debt - known as our net international liabilities - grew from 64 per cent of GDP in 2001 to 85 per cent of GDP in 2008. It has since fallen to about 69 per cent of GDP, as New Zealanders have gone from spending about $1.10 for every dollar earned to actually saving in the current year.
But while the New Zealand ship is in better shape than it was three years ago, the global waters have become significantly rougher and that has been reflected in a tougher stance from ratings agencies. Standard & Poor's and Fitch both downgraded New Zealand's sovereign rating one notch last month. This change reflects the fact the market goal posts have changed - amid global uncertainty and heightened debt fears - and what has been acceptable in the past is no longer acceptable now. This reinforces the need for the Government to continue with its balanced plan to return to surplus and get on top of debt. Read my media statement for more information.
EQC LEVIES RISE TO REFLECT INCREASED COSTS
The Government is committed to rebuilding Christchurch and supporting the people of Canterbury. The Government is providing $5.5 billion through the Canterbury Earthquake Recovery Fund alongside the roughly $7.5 billion EQC expects to pay out in Canterbury earthquake claims. To help meet EQC's share of these costs EQC levies will rise next year. This is a responsible step to ensure EQC can meet its long-term costs and continue to provide disaster cover around New Zealand in a sustainable way.
Without a levy rise EQC would have a cash shortfall of about $1.2 billion. This is the estimated cost of EQC claims over and above the funds it holds in the Natural Disaster Fund. Increasing levies will provide enough revenue to meet EQC's higher reinsurance costs, begin rebuilding the Natural Disaster Fund and it will reduce the shortfall the Government may have to cover under EQC's Crown guarantee. Read my media statement for more information.
ROUGHER GLOBAL WATERS
Meeting Ben Bernanke, Chairman of the US Federal Reserve
Late last month I attended the World Bank board of governors' annual meeting in Washington DC. I also visited the International Monetary Fund and held meetings with a range of US business, financial market and government representatives. The clear message was the US and parts of Europe still face large challenges stemming from too much debt - and it will take a while to sort it out.
The mood among politicians, ratings agencies and international financiers was pretty sombre. In fact, I would describe the mood as ugly. This has been reflected in the decisions of the ratings agencies and in some fairly turbulent market movements. As I've said this reinforces the need for the Government to stick to our economic programme aimed at lifting savings and reducing debt.
THINGS TO LOOK OUT FOR
- 25 October - Treasury will release its updated forecasts as part of the Pre-election Economic and Fiscal Update (PREFU).
- 25 October - Statistics New Zealand September quarter Consumer Price Index.
- 27 October -Reserve Bank will release its latest review of the Official Cash Rate.
- 27 October - Statistics New Zealand Overseas Merchandise Trade data for September.
- 3 November - Statistics New Zealand Household Labour Force Survey for the September quarter.
Hon Bill English
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