Returning to a Budget surplus is the best contribution the Government can make to lifting the economy's resilience and trend growth, the Treasury says in its briefing to the incoming Minister of Finance.
It calls for a firm commitment from the Government to return to surplus by 2014/15 and reduce net Crown debt to 20 per cent of gross domestic product by 2020.
Rebuilding a fiscal buffer is a priority, it says, because global shocks could focus international financial markets' attention on New Zealand's high level of overseas debt, with potentially serious effects on the availability and price of credit, and on economic activity and employment.
Additional policy changes to lift national saving and reverse the expected worsening of the external debt position might involve changes to New Zealand Superannuation entitlements and to the tax treatment of returns to capital.
It is feasible but challenging to return to surplus by 2014/15 through efficiency gains in the public sector, the Treasury says.
It expects public sector personnel costs to increase by an average 1.4 per cent a year over the next four years, half the rate of the past two years and a sixth of the rate prevailing between 2003 and 2009.
The Treasury also sees scope for better targeting of social spending.
It calls for the reintroduction of interest on student loans, on the grounds that scrapping it has discouraged saving for tertiary education without delivering any significant increase in access to it.
"Committing to a return to fiscal surplus in 2014/15 is a credible fiscal strategy and should provide financial markets with sufficient assurance about the sustainability and resilience of the Crown's financial position."
It expects the fiscal tightening required would coincide with a pick-up in the economic recovery and therefore reduce the upward pressure on interest and exchange rates as slack in the economy is taken up.
If growth disappoints, however, the Government's response should depend on the extent of the weakening.
If it is temporary there could be a case for letting the automatic fiscal stabilisers work - accepting a temporary deterioration in the deficit as revenues fall short and welfare costs increase.
But the Treasury warns that further fiscal tightening might be necessary if global developments deteriorate to such an extent that the Government's fiscal credibility is at risk.
It reiterates its concerns about the longer-term fiscal impacts of an ageing population and notes that Australia, Britain and the United States are all moving to a higher age of eligibility.
It argues that reforms that would render the cost of super more supportable, if signalled well in advance, could boost savings rates and lift labour force participation by people over 65 (a potential benefit also noted by the Labour Department).
"The Treasury implies a need to get real about the age of entitlement to national superannuation, even if it fails to declare its hand on what should be done," Labour's finance spokesman David Parker said.
"But don't expect National to get real any time soon, because that would entail having a plan."
Overall, the briefing was light on specific strategies, Parker said.
"Retrenchment is an insufficient plan to get our economy growing and stop our international liabilities growing. The Government needs to get the signals right to encourage investment in the productive export sector. That means an initiative such as a capital gains tax, but the Government is too gutless to go down such a path."
Business New Zealand chief executive Phil O'Reilly said the Treasury work was sound and orthodox.
Treasury and IRD at odds over tax reform
The Treasury and Inland Revenue seem to differ on how much scope there is for tax reform to lift the economy's performance.
In the briefing to its incoming minister, the Treasury notes the downward international trend in company tax rates and the increasing mobility of global capital and workers (especially New Zealanders). It sees in this a case for further reductions in personal and company tax rates, which is says could be funded by base broadening - it does not suggest how - or by additional cuts in low-value Government spending.
It notes in particular the wide range in rates at which different forms of capital income are taxed - debt instruments twice as hard as rental housing, for example.
"The Treasury is continuing to examine a range of options for taxing capital more evenly and at lower rates," it says.
But the IRD in its briefing paper says tax changes are unlikely to provide a silver bullet for driving economic growth.
"While taxes do distort behaviour in significant ways and should be levied in the fairest and least distorting way possible, tax can be a blunt instrument for attaining wider economic goals," IRD says. "This is likely to be especially true in a constrained fiscal environment if cutting one tax means increasing others and if fairness concerns prevent the Government from making the tax system more efficient but less progressive."
While the company tax take is relatively high compared with other OECD countries, it has reduced markedly and it is unclear how much of that is cyclical and how much structural, it says.
Overall tax revenue has fallen from 35 per cent of GDP in 2007 to 31 per cent in 2010, with more of the decline due to policy changes, it believes, than the economic downturn.By Brian Fallow Email Brian