English clips savings group's wings

Meridian Energy's dividend made up a large part of the Government's SOE revenue of $800 million. Photo / Simon Baker

Finance Minister Bill English fired a warning shot across the bows of the savings working group yesterday.

There was no room for any additional financial incentives for saving, he said. "No room at all."

This further limits the options of the group, chaired by Kerry McDonald, whose terms of reference also exclude any changes to New Zealand Superannuation or recommending a capital gains tax.

The context for English's comments was the release of the Government financial statements for the year to June 30, 2010.

They showed the Crown ran an overall cash deficit of $9 billion, which is due to rise to $13 billion in the current year.

Half the cash shortfall was the Government's operating deficit of $4.5 billion, which was driven by a $4 billion drop in tax revenue, while operating expenditure remained flat.

Most of the other half was capital expenditure ($1.8 billion) and loans to students and district health boards ($2 billion). The Government received $800 million in dividends from state-owned enterprises, three-quarters of it from Meridian Energy and Mighty River Power.

That was $500 million more than the previous year.

The deterioration in the Crown accounts - from a $2 billion surplus in the 2007/08 year to a forecast $13 billion deficit this year - has been the major shock absorber buffering the economy from the effects of the global financial crisis and recession, English said.

But it has seen the Government's net debt balloon from $10 billion two years ago to $26 billion now.

It is forecast to rise above $60 billion by 2013/14 and not peak until a year or two after that.

"It is still relatively low by international standards.

"It is likely to peak at less than 30 per cent of GDP, where some countries are heading for 100 per cent," English said.

"That is one reason we have been able to take a more moderate view of fiscal consolidation than, say, the United Kingdom. But it is vital to stay on a track to surplus."

The mid-year update to the Treasury's economic and fiscal forecasts, due in December, is unlikely to contain any positive surprises on growth or revenue, he said.

The recovery would continue to be export-led and not fuelled by debt and consumption.

English pointed to evidence of a desirable rebalancing of the economy, highlighting in particular the switch from the net withdrawal of housing equity prevalent during the years of the boom, which turbocharged consumption, back to net equity injection.

At its peak in 2007 equity withdrawal exceeded $7 billion, but two years later it had switched to equity injection of around $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," he said.

"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."