Drought raises fear of return to recession

HAMISH RUTHERFORD AND TRACY WATKINS
Last updated 11:23 12/03/2013

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Finance Minister Bill English says the drought across the North Island will affect the Government's tax take but is "unlikely" to push the country back into recession.

Speaking to reporters in Parliament today English, who is acting prime minister while John Key is overseas, said recent forecasts had looked better than expected, but the drought would bring this back.

"Generally the outlook was looking a bit more positive than expected and the drought will peg it back, but we're not quite sure how far."

Some of the major banks have published estimates that the drought could knock $500 million to $1 billion off New Zealand's gross domestic product.

"If it's that big it would affect our tax take," English said, although he did not believe it would push New Zealand into recession.

"I think that's highly unlikely. It would have to be a very severe drought to have that impact."

Treasury would be watching closely the impact of the drought as it prepares for the May 16 Budget, but English did not expect the impact to be "dramatic".

"Where we thought we might get a bit of room to move that's probably not going to be the case, and it'll continue to be a tight budget."

He did not believe it would derail the Government's target of reaching budget surplus by 2014-15.

"We're aiming for surplus and we'll see what the forecasts tell us. I would expect though that we'll still be able to achieve surplus."

The Government has signalled that this year's Budget could include $800m of new spending, a figure English did not expect to be reduced.

Treasury's downside scenario in December's half-year economic and fiscal update suggests it would not take much to push the surplus target off track.

Shaving just 0.5 per cent off economic growth over the five years till March 2017 would see core Crown revenue cut by $7.9b and debt rise.

Only last month, the Treasury was celebrating a lift in the economy. But as the drought deepens, English would not rule out a return to recession.

"We don't know the extent of the drought yet . . . so we can't rule it out."

The Government has officially declared drought in Northland, Auckland, Waikato, Bay of Plenty and Hawke's Bay. Regions including Manawatu, Rangitikei and Wairarapa are likely to follow suit if rain does not come soon.

Wairarapa farmers will formally petition the Government today to declare the region in drought.

A drought declaration entitles farmers to special assistance, including a means-tested hardship grant equivalent to the unemployment benefit.

Work and Income confirmed yesterday there had been no payments or applications for grants under the rural assistance scheme since drought was declared in the five regions.

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- Fairfax Media

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