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The Government's medium-term fiscal strategy

The medium-term fiscal strategy has remained unchanged since the Government's first budget in 2008‑09. The key elements of the strategy are to:

• achieve budget surpluses, on average, over the medium term;
• keep taxation as a share of GDP below the level for 2007‑08, on average; and
• improve the Government's net financial worth over the medium term.

The strategy provides the necessary flexibility for the budget position to vary in line with economic conditions, as it did in response to the global financial crisis, while providing for long-term fiscal sustainability.

In order to return the budget to surplus as quickly as possible after the global financial crisis, the Government also committed to:

• allow the level of tax receipts to recover naturally as the economy improves, while maintaining the Government's commitment to keep taxation as a share of GDP below the 2007‑08 level on average; and
• hold real growth in spending to 2 per cent a year until the budget returns to surplus.

The focus remains on returning the budget to surplus, including by continuing to reprioritise existing expenditure consistent with 2 per cent real expenditure growth and by allowing the level of tax receipts to continue to recover naturally as the economy improves.

Once the budget returns to surplus, and while the economy is growing at or above trend, the Government will maintain expenditure restraint by retaining a 2 per cent annual cap on real spending growth, on average, until surpluses are at least 1 per cent of GDP.

Delivering on the fiscal strategy

The Government has continued to demonstrate strong fiscal discipline, as required by the fiscal strategy. This discipline ensures that strengthening economic growth feeds directly through to a strengthening budget position. This strategy is expected to produce the fastest fiscal consolidation in at least 40 years (see Box 3.1).

Real growth in spending will be held to below 2 per cent a year as the economy returns to above trend growth (see Table 3.1). Restraint in spending growth and the natural recovery of tax receipts will see a progressive tightening of the fiscal policy stance over the forward estimates.

Table 3.1: Delivering the 2 per cent commitment

Since PEFO, the Government has offset all new spending decisions over the forward estimates, including those related to election commitments, by finding savings in other parts of the budget.

Table 3.2 shows the net effect of policy decisions taken since PEFO is a net saving of $82 million over the forward estimates. In assessing performance against the fiscal strategy, the total effect of policy decisions is adjusted to account for amounts that have previously been provided for in the Contingency Reserve. The Contingency Reserve offsets to policy decisions principally relate to official development assistance and provisioning for digital television switchover.

Table 3.2: Delivering fiscal reprioritisation

1. On an underlying cash balance basis.

Medium term

The budget position is projected to continue to strengthen over the medium term. The underlying cash balance is projected to reach a surplus of 1 per cent of GDP in 2016-17 (see Chart 3.1). Net debt is projected to return to zero in 2018-19, after peaking at 6.4 per cent of GDP in 2011‑12 (see Chart 3.2).

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