Treasury has cut its forecasts for economic growth and warned of higher national debt, but maintains the Government can balance its books within three years.
However, the wafer thin margins appear to have been achieved by a last-minute announcement of sharp increases in tax on petrol.
In today’s half-yearly opening of the Government’s books, Treasury trimmed growth forecasts for the economy for each of the next two years, as well as the longer term projection, by about 0.5 per cent a year.
The amount of tax collected in recent months has been lower than expected because of weak growth, and debt is now expected to peak at 29.5 per cent of New Zealand’s gross domestic product (GDP) in 2015, where it would remain virtually unchanged until 2017.
In May’s Budget, national debt was forecast to peak at 28.7 per cent of GDP, and be lower in 2016 than 2013. The Government has signalled to the major international ratings agencies that it will keep national debt below 30 per cent.
But despite weaker expectations across almost every aspect of its forecasts, the Treasury still maintains that the Government is on track to meet its target to balance its books by 2014-15, forecasting a surplus of $66 million, down from $197m surplus forecast in May.
“The global economic environment remains uncertain and this makes it even more important to maintain clear and credible fiscal settings,’’ Finance Minister Bill English said in a statement, as he signalled there would be further restraint in public spending in next May’s Budget.
“This is a time for sensible and reasonable policy – not for untried economic experiments. Budget 2013 will confirm the Government’s commitment to responsible long-term fiscal management.”
Spending restraint had become a “semi permanent part” of being in Government, English said at today’s presentation.
The 2014-15 surplus “is not large, but we’re headed in the right direction”, he said, adding that while spending would remain restrained, if growth continued to miss targets, the target date may change.
“We’re not willing to get to surplus at any cost,” English said.
This morning Gerry Brownlee announced plans to increase excise tax on petrol by 3 cents a litre, in each of the next three years. This would raise Government income by up to $300m a year.
While English said the increase would have an impact on the Government’s accounts, he denied it was done to ensure the forecasts showed a surplus.
“Without the changes, we would have fallen short of the surplus track.”
Today’s announcement also saw forecasts that by 2015-16 the New Zealand Debt Management Office would borrow $6.5b more than it forecast six months ago.
“That is a concern,’’ English told reporters.
The latest forecasts were for “slightly” weaker growth than six months ago, having taken into account weaker global expectations.
“Compared to many other countries, the New Zealand economy is in good shape. Despite our growth forecasts being slightly weaker than in Budget 2012, New Zealand is expected to grow more strongly over the next four years than the Euro area, the United Kingdom, Japan and Canada.”
Treasury said its growth forecasts, 2.3 per cent and 2.9 per cent for the next two years and 2.4 per cent thereafter, were based on expectations of a “substantial boost” to the Canterbury rebuild, continued lower borrowing costs and ongoing solid demand for primary products.
This would be offset by a stubbornly high exchange rate, which would act as a “drag on growth”, Treasury’s statement said.
Interest rates, currently at the lowest rates in decades, should stay lower than previously thought, with the Treasury tipping the Reserve Bank will keep the Official Cast Rate at its record low of 2.5 per cent until September 2013, with gradual increases afterwards.
Treasury predicted the rate of unemployment would be about 1 per cent higher over the next five years than it expected in May.
Averaging 6.7 per cent in 2012, Treasury said unemployment would hit 6.9 per cent in 2013, before falling gradually to 5.1 per cent in 2017.
“Most [in] New Zealand still have jobs,” English said, adding that those who did were enjoying low mortgage rates and strong purchasing power because of the strong kiwi dollar. However, he conceded the labour market was weaker than the Government hoped.
“Too many people don’t have jobs and there is no doubt that the labour market is weaker than we would like to see it.”
The Government’s Budget Policy Statement, which accompanied the Treasury update, signalled further cuts to public spending.
Core Crown expenses are forecast to fall to 30.3 per cent of GDP by 2015-16, compared to the peak of 35.1 per cent in 2010/11. The drop in Crown expenses is largely unchanged from six months ago.
“In the interests of taxpayers, it is important that we lock in longer-term control of expenditure through ongoing public sector reform. That will enable us to start repaying debt and build a buffer against economic shocks and natural disasters,” English said.
Plans to raise up to $7b from the partial privatisation of four state owned enterprises remain in the statement, with the funds earmarked for a new Future Investment Fund.
More details on how the fund would be spent would be contained in May’s Budget.