The Government’s operating deficit before gains and losses is expected to reach around $16.7 billion for the year to 30 June, as forecast in the Budget last month, Finance Minister Bill English says.

This is despite core Crown expenses coming in $525 million below forecast for the 10 months to 30 April, leaving the OBEGAL deficit at $10.9 billion for the 10 months.

“We will run a record annual deficit this year and it’s essential that we take the steps outlined in the Budget to bring it down and return to surplus by 2014/15,” Mr English says.

“We have borrowed an average $380 million of net new debt every week this fiscal year. That simply could not continue. Budget measures will reduce that net borrowing to around $100 million a week in the coming year.

“The OBEGAL deficit is expected to fall below $10 billion next year and be virtually eliminated in 2013/14, before the Government then starts running surpluses and repaying debt.

“This is one of the largest contributions the Government can make to lifting national savings and building faster growth built on exports and productive investment.”

The budget deficit this year will include some significant one-off costs, including the Earthquake Commission’s $3 billion share of the two Canterbury earthquakes and some of the Government’s cost of meeting deposit guarantees for collapsed finance companies.

Crown accounts published today show the OBEGAL deficit of $10.9 billion for the 10 months to 30 April – about $400 million lower than the $11.3 billion forecast in the Budget.

Most of the difference stemmed from core Crown expenses coming in $525 million below forecast, due to a number of relatively small differences which are expected to reverse before the end of the fiscal year.

The Government is proposing changes that will reduce the number of government agencies as it seeks better value for money, less duplication and improved co-ordination across the state sector, Deputy Prime Minister Bill English and State Services Minister Tony Ryall announced today.

The proposals include disestablishing five crown entities and three tribunals, merging two government agencies, establishing shared corporate services across the government's three central agencies and consolidating the services of a number of others.

"New Zealand currently has 39 government departments, over 150 Crown entities of various types, not including school boards of trustees, and more than 200 other agencies," Mr English says.

"As the Prime Minister said in his Statement to Parliament, we want government administration to be as efficient and well organised as it can be. At present the costs of running government are too high and there is too much duplication and waste.

"We have a wide-ranging programme of reform as we seek to improve frontline public services within tight financial constraints. Structural changes are only a small part of that programme and will go ahead only where they make sense.

"In this case, we believe the proposed changes have the potential to reduce duplication of roles and back office functions and improve the cohesion of frontline services," Mr English says.

State Services Minister Tony Ryall says the Government is committed to improving the efficiency, coordination and quality of public services.

"This means focusing government efforts and funding on the things that matter most to New Zealanders – and making sure we do them well.

"Officials are now undertaking due diligence on the proposals, which will involve gathering financial and other information from the affected organisations and listening to the views of chief executives, board chairs, staff and other key stakeholders.

"We expect these changes will result in savings over the medium term, which will be offset by some initial upfront costs. However there are no goals for staff reductions or money saved.

"We expect the changes to happen, unless the due diligence produces better alternatives or there are compelling reasons not to proceed with the proposed changes," Mr Ryall says.

Officials are expected to report back in July, after which Cabinet will make final decisions.

The proposals are:

Crown entities and tribunals – There are seven proposals for changes to Crown entities and tribunals:
· Set up an arms-length health promotion agency to take over the relevant functions of the Alcohol Advisory Council of New Zealand (ALAC), the Health Sponsorship Council (HSC) and the Ministry of Health.

· Disestablish the Crown Health Financing Agency and transfer its district health board lending function to either the Ministry of Health or to the Debt Management Office; transfer the management of residual Area Health Board liabilities to the Ministry of Health, and determine the best location for property functions.

Enable the Mental Health Commission to complete the new Mental Health Blueprint, while providing for the long-term viability of its other functions by delegating the advocacy functions to a separate Mental Health Commissioner in the office of the Health and Disability Commissioner and delegating other functions to the Ministry of Health; or bring forward the date the Mental Health Commission is due to cease functioning (currently 31 August 2015).
· Transfer the functions of the Charities Commission to the Department of Internal Affairs, while ensuring that registration decisions remain separate from Ministers.

· Disestablish three tribunals – the Health Act Boards of Appeal; the Maritime Appeal Authority; and the Land Valuation Tribunals – and transfer their functions to the District Court, to be included in further work led by the Justice Ministry to streamline tribunals and improve efficiency.

Arts, Culture and Heritage sector:

· Encourage greater collaboration between the New Zealand Film Commission and Film New Zealand.

· Consolidate audiovisual archiving. Encourage the New Zealand Film Archive, Radio New Zealand, and Television New Zealand to consolidate material into the Film Archive.

· Consolidate management of heritage property portfolios between the New Zealand Historic Places Trust, the Department of Conservation and potentially other agencies in the arts, culture and heritage sector.

· Work with the Broadcasting Standards Authority, the Advertising Standards Authority, the Press Council and the Office of Film and Literature Classification to look at opportunities for greater collaboration.

Education sector:

· Transfer work within Vote Employment from the Department of Labour to the Ministry of Education.

· Merge the Education Review Office and the New Zealand Qualifications Authority into a single education quality assurance agency.

In addition, as part of their leadership role, the three central agencies, the State Services Commission, the Department of the Prime Minister and Cabinet and the Treasury are consulting with staff on a proposal to establish a shared services centre to integrate their back office functions.

"Once final decisions have been made, it is expected that by March, 2012 these three agencies will have a single corporate service for transactional functions. This will enable improved performance, cost savings and a lift in productivity,” Mr Ryall says.

The Government has established a new group to advise on state sector reform, Deputy Prime Minister Bill English and State Services Minister Tony Ryall announced today.

"As the Prime Minister said in his Statement to Parliament, the Government is committed to getting better value for money from public spending so we can deliver better public services to taxpayers with little or no new money over the next few years," Mr English says.

"With the Government committed to returning to budget surplus in 2014/15, change in the state sector now needs to pick up momentum. This is about identifying the things that matter most to New Zealanders, doing them better and doing them with less back-office bureaucracy.

"The public service itself has an important role to play in implementing change and we are keen to pick up on their ideas and propositions. The Better Public Services Advisory Group will provide support and advice to State Sector Ministers and help prioritise our broad work programme.

"We expect this group, which includes five senior public servants and three external appointments, to help ensure the changes we make improve the focus and results of the public service as a whole," Mr English says.

Mr Ryall says the new group brings together a high level of knowledge and experience from central government, local government, business and the non-government sector.

"There is a pressing need to improve the quality and direction of our public services. The world has changed a lot in the last 20 years and the state sector needs to reflect that.

"The group's members will bring a clear focus on value-for-money, innovation, high-quality service provision and effective change management.

"I have no doubt the group will help ensure any changes are based firmly on an understanding of what works best for government and for the people of New Zealand," Mr Ryall says.

The advisory group will be supported by officials from the three central agencies of government.

Better Public Services Advisory Group membership

The eight members of the Better Public Services Advisory Group are:

· Department of Prime Minister and Cabinet chief executive Maarten Wevers (chair).

· Watercare Services Ltd (Auckland) chief executive Mark Ford.

· Air New Zealand group general manager, people and technical operations, Vanessa Stoddart.

· Wise Group chief executive Jacqui Graham.

· State Services Commissioner Iain Rennie.

· Acting Treasury Secretary Gabriel Makhlouf.

· Ministry of Social Development chief executive Peter Hughes.

· Ministry of Justice deputy chief executive Sandi Beatie.

Cabinet papers and other links relating to the Government's state sector reforms can be found at www.dpmc.govt.nz/better_public_services.

BUDGET 2011 – FASTER SURPLUS, PLATFORM FOR GROWTH

Click here to watch the video about Budget 2011 I made with the Prime Minister

Budget 2011 marks the next step in this Government’s programme to tilt the economy towards exports, savings and investment and away from borrowing and consumption. It helps to lift national savings by returning the Government's books to surplus sooner, increasing the level of private savings in KiwiSaver and providing quality investment opportunities for New Zealanders.

It does this while funding the Government's $5.5 billion share of the costs of rebuilding Christchurch, investing more in frontline services in health and education and continuing to protect the most vulnerable. This is a responsible and balanced budget for the times. It ensures New Zealand will build faster growth based on savings and exports, so New Zealanders have the jobs and higher incomes they deserve.

For more information read my main Budget media statement.

BUDGET 2011 – AT A GLANCE       

• Returns the budget to surplus in 2014/15 – a year sooner than forecast in December – reducing the need for Government borrowing and lifting national savings.
• Forecast economic growth of 4 per cent in 2012, with 170,000 new jobs being created by 2015.
• Creates the $5.5 billion Canterbury Earthquake Recovery Fund for infrastructure and schools; temporary housing; trades training; welfare and business support; and CBD demolition costs.
• Invests $4 billion in frontline public services in areas such as health, education and supporting young people into jobs.
• Makes changes to KiwiSaver, Working for Families and Student Loans to make the schemes sustainable into the future and reduce the need for Government borrowing.
• Creates investment opportunities for New Zealanders by extending the mixed ownership model to four state-owned energy companies and reducing the Government’s majority stake in Air New Zealand.

REDUCING BORROWING, LIFTING NATIONAL SAVINGS

The Government has supported the economy through the recession, but with growth forecast to reach 4 per cent next year – its highest level since 2004 - and the economy expected to create 170,000 new jobs over the next four years, it is appropriate to speed up the Government’s return to surplus.

Achieving a surplus in 2014/15 – a year earlier than previously forecast - reduces the need for Government borrowing and supports jobs and growth by reducing pressure on interest rates. It will also put the public finances in a stronger position to cope with future shocks.

Budget 2011 changes mean the Government will borrow over $10 billion less over the next four years. 

BETTER VALUE FROM PUBLIC SPENDING   

Budget 2011 identifies savings of $5.2 billion over five years from existing spending. This includes savings from the back office of the public service and changes to large schemes that put them on a more sustainable and enduring footing.

Almost $4 billion of Budget 2011 savings are redirected to new initiatives –most of it on frontline services in health and education. This leaves a net saving of $1.2 billion over four years. We were previously planning to spend $4.4 billion over that period – so that's $5.6 billion we won't have to borrow over those four years from operating spending alone. 

We also intend to extend the Mixed Ownership Model to the four State-owned energy companies and reduce our shareholding in Air New Zealand – while retaining a majority stake. This is expected to free up over $5 billion.

Together that's over $10 billion we won't need to borrow over the next four years. These savings combined with forecast economic growth, mean net debt will remain below 30 per cent of GDP – a significant achievement in the current circumstances.

MAKING LARGE PROGRAMMES MORE SUSTAINABLE

Changes aimed at making KiwiSaver, Working for Families and student loans more sustainable will take place after the election – giving voters a clear opportunity to choose whether they support the Government's approach.

Changes to KiwiSaver reduce the amount the Government is borrowing to pay in subsidies and encourage a higher level of real savings through slightly higher member and employer contributions. The changes will maintain strong inflows into KiwiSaver, with total funds projected to rise from around $8 billion currently, to almost $60 billion in 10 years.

This is expected to result in a modest improvement in the rate of national savings and reduce New Zealand’s net international liabilities – the amount the country owes to foreign lenders – by an estimated two per cent of GDP over the next decade.

Changes to Working for Families will better target the scheme to low income earners, saving $448 million over four years – about 4 per cent of the scheme's current annual cost of $2.8 billion. The changes will take place in four steps – over about eight years – minimising the impact on affected families. Student loans remain interest free but a number of changes restrict eligibility, encourage greater personal responsibility and put tighter obligations on borrowers.

IMPROVING FRONTLINE SERVICES

Budget 2011 provides record funding for health – an extra $2.2 billion over the next four years, including an additional $585 million next year.

In education, the Government has allocated an extra $1.4 billion for schools and early childhood education over the next four years. Education and Tertiary Education spending will rise to a record $12.2 billion next year - a massive total in difficult economic times.

Budget 2011 also provides another $1.6 billion of infrastructure funding with the lion's share invested in schools, ultra-fast broadband and rail. This investment sits alongside the over $1 billion a year we put into improving the State Highway network and the $3.8 billion we are spending over five years to upgrade the national grid.

BOOSTING SAVINGS AND INVESTMENT

Extending the mixed ownership model is expected to free up $5 billion to $7 billion, which will fund much of the Government's capital investment in social assets like schools and hospitals over the next few years, as well as reduce Government borrowing.

As we have said, we will ensure Kiwi investors are at the front of the queue to buy a stake in these companies. Extending the mixed ownership model will also broaden the pool of investments available to New Zealanders, contribute to deeper capital markets and bring sharper commercial disciplines, more transparency and greater external oversight for the companies involved.

In addition, Budget 2011 creates an Earthquake Kiwi Bond, establishes a new local government funding agency and resources government agencies to support New Zealanders in making informed investment decisions.

Finance Minister Bill English leaves on 23 May for Singapore and Hong Kong, where he will speak to business, investment and political leaders about New Zealand’s progress in building faster growth and higher national savings.

“Budget 2011 sets out a faster path to healthy surplus in 2014/15 - a year sooner than expected last year, despite the large costs involved in our commitment to rebuild Christchurch,” Mr English says. “Given the significant challenges we have faced in the past three years, this achievement should not be under estimated.

“The Budget also helps lift national savings by returning to surplus sooner, increasing private savings in KiwiSaver and providing quality investment opportunities for New Zealanders.

“Compared to the outlook of most developed countries, this is a strong economic story, which I am keen to share.

“I am confident the investment and business communities in Singapore and Hong Kong will understand the significant progress we are making in turning around New Zealand’s high levels of debt and lifting national savings.”

In Singapore, Mr English will speak to the Euromoney Australia and New Zealand Debt Capital Markets Forum, the New Zealand Chamber of Commerce and a function of senior fund managers.

He will also meet Singapore’s Prime Minister Lee Hsien Loong, Finance Minister Tharman Shanmugaratnam and Singapore Monetary Authority managing director Ravi Menon.

In Hong Kong on 26 May, Mr English will meet Hong Kong Monetary Authority chief executive Norman Chan and speak at a New Zealand capital markets forum and a business function at the Foreign Correspondents’ Club.

He returns to New Zealand on 27 May.
 

Documents released today show the Government has taken a balanced and responsible approach in providing a back-up financial support package for AMI policyholders, Finance Minister Bill English says. 

Treasury today proactively released a range of documents on its website relating to the Government's $500 million back-up support package, which was announced on 7 April.

"The support package, which will be called on only as a last resort, gives policyholders certainty, helps ensure an orderly rebuild of Christchurch and gives AMI the time to seek a market solution to the challenges it faces as a result of the two Canterbury earthquakes,” Mr English says.

"Since the package was announced, the Government has been engaging constructively with AMI."

The Crown has appointed a director to AMI's board and inspectors have been appointed to assist the Crown in monitoring the company. Treasury officials have had a number of meetings with AMI's management and processes have been put in place to ensure the company keeps officials informed of developments.

"The implications for the Crown accounts of the support package are still very uncertain and will remain so for a number of months as AMI continues to assess earthquake claims," Mr English says. 

"Due to this high level of uncertainty, next week's Budget documents will take a cautious and conservative approach to measuring the potential costs of the package even though the Crown may never have to make a payment."

The Crown has the capacity, if necessary, to direct the operating and governing policies of AMI and take control of the board through its option to make a partial payment. The Crown is also directly impacted by the risks or benefits of AMI’s operations because of the support package.

"As a result, Treasury expects to include AMI – including its full assets and liabilities - in the consolidated Crown accounts when it completes the 2010/11 year-end accounts in October," Mr English says.

Improved performance by ACC in the Non-Earners’ Account has freed up $638 million of taxpayer funding over the next four years, Finance Minister Bill English and ACC Minister Nick Smith announced today.

The Non-Earners’ Account covers claims for injuries to people who are not in the paid workforce, such as students, beneficiaries, retired people and children. This account is funded by the Government, using money collected from general taxation.

“The ACC scheme got into real difficulty with claims costs increasing by 57% and liabilities by 109% between 2004/05 and 2008/09.  The Government in 2009 initiated changes to governance, reversal of entitlement extensions, putting increased emphasis on improved rehabilitation, containing costs, and increasing levies,” Dr Smith says.

“I am particularly proud of the work ACC has done to turn around rehabilitation rates that have had a huge impact on costs of the scheme.  The 70-day rate deteriorated from 73% to 68% in the five years prior to 2009, but has consistently improved and is now back at 71%.  Every 1% improvement in rehabilitation rates reduces liabilities by around $500 million.

“These reforms have led ACC back to a path of financial sustainability while ensuring claimants receive proper care, rehabilitation and compensation. This prudent management has resulted in a reduction in funding of $177 million for the ACC’s Non-Earners’ Account in the 2011/12 Budget and an expected $638 million over the four years to 2014/15.”

There was no increase in levies this year and ACC’s financial turnaround will give some room for levy reductions when considered later in the year.

Mr English says the strong turnaround in ACC’s Non-Earners’ Account was not only good news for the many thousands of New Zealanders who rely on it, but it will make a significant contribution to the Government’s wider programme to return to budget surplus as soon as possible.

“It’s important that the Government plays its part in lifting national savings by getting its own finances in order, returning to budget surplus and repaying debt,” Mr English says.

“The Budget later this month will take further steps in that direction by setting a credible path back to surplus. We will do that while continuing to support the most vulnerable and maintaining public services.”

In the past two Budgets, the Government reprioritised almost $4 billion of spending and Mr English says there will be more progress on this score in Budget 2011.

“The significant amount of money freed up by ACC’s turnaround, when added to these other measures, show the Government is taking a responsible approach to managing its finances, while at the same time improving public services,” Mr English says.

“Budget” in below graph is reference to ACC’s 2010/11 SOI budget projections.

The Budget next week will set a credible path back to budget surplus, after Government financial statements today confirmed a $10.2 billion operating deficit before gains and losses for the nine months to 31 March, Finance Minister Bill English says.

The deficit includes the Earthquake Commission’s $1.5 billion estimated share of costs for the February earthquake in Christchurch. However, it does not include the Government’s support package for AMI policyholders, which was signed after 31 March.

“Compared to the December forecasts, the accounts for March were broadly in line with February’s results,” Mr English says.

“The Budget next week will confirm a very large deficit for the current year, including the immediate costs of rebuilding Christchurch.

“But it will also confirm significant improvements in the fiscal position over the next few years, before we return to surplus and start repaying debt. To achieve that, the Government has completed a careful and balanced review of its spending priorities, which we will outline in the Budget.

“It’s essential that the Government gets its own finances in order as quickly as possible, so it can join households and businesses in lifting national savings and reducing New Zealand’s vulnerability to foreign lenders.”

The Government’s accounts for the nine months to March show the $10.2 billion operating deficit before gains and losses compared with an $8.9 billion deficit forecast in the Half Year Update in December. EQC’s costs for the February earthquake accounted for most of the difference.

At $3.3 billion, the operating deficit included gains and losses was $3.8 billion better than forecast, mainly reflecting gains from share investments by the New Zealand Super Fund and ACC, along with actuarial gains on ACC and Government Super Fund liabilities.

The cash deficit was close to forecast at $12.4 billion for the nine months.

The Government’s Review of Expenditure on Policy Advice identifies several significant issues with the cost, quality and management of policy advice and makes 36 recommendations to address them.

The review, announced last year, will help the Government’s wider programme to control growth in the costs of public sector back office functions and deliver better frontline public services, Finance Minister Bill English says.

However, it does not recommend specific cuts to policy advice spending.

"It is vital that the Government receives high quality and cost effective policy advice," he says. "Providing policy advice is a core part of what the public service does and it affects how public money is spent, how the Government operates and what future public services will look like.

"The review identified several issues, including the need to set clear policy priorities across agencies and other information sharing initiatives."

The Treasury, State Services Commission and Department of Prime Minister and Cabinet have been asked to produce a detailed plan by 30 June 2011 to pick up on the review’s recommendations and to ensure public agencies follow the plan.

In 2010/11, policy-related appropriations across government agencies amounted to more than $880 million – up from about $510 million in 2003. However, some of these appropriations were used for non-policy outputs, leaving actual policy spending at just over $520 million, according to the review.

"This is a significant amount of money and we owe it to taxpayers to ensure that government spending on policy advice is both effective and well targeted," State Services Minister Tony Ryall says.

"Although this spending on policy advice represents less than 1 per cent of the Government’s $70 billion in total annual spending, it critically shapes the Government’s wider policy programmes and strongly influences New Zealand’s wider economic performance and social outcomes."

Regulatory Reform Minister Rodney Hide welcomed the policy advice review, which fell within the ACT Party’s confidence and supply agreement with National to initiate a series of taskforces on government spending.

"ACT campaigned on the need for stricter disciplines in relation to public sector spending. Currently there is too much variation in the quality of policy advice and we believe the public deserves better," Mr Hide says.

"These changes will improve the value for money in the public sector and will lead to improvements in the quality of advice ministers receive."

The Review of Expenditure on Policy Advice was chaired by former Treasury secretary Graham Scott. Other members of the review team were former secretary of the Department of Human Services in Victoria Patricia Faulkner, and Commerce Commission member Pat Duignan.

The review cost about $80,000, excluding the cost of secretariat support, which was met by reallocating existing Treasury and State service Commission funding.

The review team’s report and the Government’s response are available at: www.treasury.govt.nz/statesector/policyexpenditurereview

The Government agrees with the OECD that New Zealand should return to budget surplus as soon as possible and the Budget next month will take steps in that direction, Finance Minister Bill English says.

“In its economic survey of New Zealand out today, the OECD points out that achieving faster economic growth requires progress across a broad policy front,” Mr English says.

“In particular, it recommends a faster improvement in our fiscal position, which would take the pressure off monetary policy. The OECD points out this would allow interest rates to remain low for longer and create room for the exchange rate to ease.

“All of this would support the economic adjustment - which is already underway - to build faster growth from savings, exports and productive investment, rather than excessive borrowing and increases in government spending.”

Mr English says the Budget next month will set out several measures that will help the Government return to budget surplus.

“Budget 2011 will take further steps to get the Government’s finances in order, setting a path back to surplus so we can start repaying debt on behalf of taxpayers and help increase national savings.

“We will do that while continuing to support the most vulnerable and maintaining public services.”

The OECD report is available at:

http://www.oecd.org/document/34/0,3746,en_2649_33733_47611554_1_1_1_1,00.html