Budget 2014: Books back in black - now to tackle debt

Finance Minister Bill English reading his Budget 2014 in Parliament.

Interest costs $3.6 billion a year and we still borrow $75 million a week.

Finance Minister Bill English's next big target will be getting New Zealand's record debt level down, now the Government's books are back in the black.

He vowed yesterday to use any extra revenue the Government receives over and above forecasts in the foreseeable future to repay debt.

"Paying the interest on our debt this year will cost $3.6 billion - more than we will spend on the police and early childhood education combined," he said.

Expanding free doctor visits and prescriptions from 5-year-olds to 12-year-olds was the real Budget surprise, overshadowing the well-foreshadowed surplus.

And potential tax cuts took a back seat, too, with Mr English and Prime Minister John Key both saying these would be "modest" if they eventuated.

Commentators suggested the Budget could have been delivered by Labour, given the $500 million family-focused package, including an expansion of paid parental leave.

But Labour leader David Cunliffe said it was a Budget not for ordinary New Zealanders but for big corporates, big noters and the big end of town.

"Another $40 million in irrigation subsidies for dairy farmers that are already drowning in cash," he said.

"Continuing tax breaks for property speculators, with no capital gains tax and no limit in foreigners trading Kiwis out of their home."

He condemned it as a Budget that did nothing for the poor or for first-home buyers and pointed to delays, such as ACC levy cuts, which had contributed to the surplus.

Mr Key acknowledged that the ACC levy delay had affected the figures but said it was very important for New Zealand to be back in surplus.

"That speaks to a country that is doing well and people will feel confident by the fact that we are starting to earn more than we are actually spending in the world."

National took over the Treasury benches in 2008 when net debt was just $10 billion.

But while Mr English ran up record debt, he said he knew he needed a plan to get it back down.

"We considered it the right thing to do to run deficits and borrow to support New Zealanders through the difficult years following the recession, the Christchurch earthquake and the Global Financial Crisis.

"Households know carrying substantial debt is neither comfortable nor financially prudent." The only way to get it down was to stick to the fiscal track in the Budget.

The Government is still borrowing money but it is now down to $75 million a week, less than the $110 million a week last year.

Net Government debt is expected to peak at $66 billion in 2016-17, or 26 per cent of GDP.

The Government's target is to get debt to below 20 per cent of GDP.

"If tax revenue comes in well ahead of forecast, the Government's main priority will be additional debt repayment until the 20 per cent debt target is met," Mr English said.

If the economy grows enough, the debt target can reduce as a percentage of GDP without the actual total sum of the debt reducing.

The first year in which the total will start reducing is 2017-18, Mr English said. That is when the Government will post its first cash surplus since the Global Financial Crisis.

The surplus takes into account all the money in and out of the Government books, not just the operating balance.

It is forecast to be just $372 million in a Budget of $73 billion of core Government spending. That's relatively small, but not as wafer thin as the $86 million forecast back in December.

Rising revenues are expected, with economic growth forecast to be 2.8 per cent on average over the next four years.

The surpluses will rise, too, to about $1.3 billion, $2.4 billion, and then $3.5 billion in the 2017-18 year.

The surplus could theoretically be threatened if the Government revenue forecasts for the 2014-15 year turn out to be way out.

But delays in expenditure, such as further ACC levy cuts, could be used to get it back on track.

The Treasury will update the Budget forecasts before the election.

The Budget contains new operating spending of $1 billion. The allowance for new spending next year was to have been $1 billion also, but Mr English said the Treasury had advised him that could be lifted to $1.5 billion before it began to "materially affect" interest rates.

On that basis, the operating allowance for next year's Budget would be increased to the higher figure, growing 2 per cent a year after that.