Economist warns state cuts raise the risks of recession

Finance Minister Bill English says "restraint in the public sector is only just starting", but a union economist says faster cuts in state spending risk tipping the economy back into recession.

Mr English said he aimed to get the Government's books back in surplus before the Budget forecasts of 2015-16, and would weed out "lower priority spending", after Treasury reported a better than expected deficit.

Figures out yesterday showed a government deficit of $4.7 billion for the 11 months to May. The deficit, before investment gains and losses, was $1.1b smaller than expected on Budget night in May.

GST was almost $240 million more than expected. Government spending was $558m behind forecast.

Mr English said "good progress" had been made in keeping spending under control, and delivering a faster growing economy that would help revenue grow. "However, in many ways, restraint in the public sector is only just starting," he said.

In the last two Budgets, the Government brought the deficit and government debt under control, and in the next few years they would build on that by living within the $1.1b annual allowance for extra operating spending. "And weeding out lower priority spending," Mr English said.

But Council of Trade Unions economist Bill Rosenberg said faster cuts in government spending risked tipping the economy back into recession.

The economy is recovering from recession at a slow pace, with weak growth of just 0.6 per cent in the March quarter. The economy has not yet returned to levels of activity seen before the recession, while official interest rates are already starting to rise.

Despite steady reductions in the deficit, well ahead of forecasts, Mr English was talking of getting back into surplus even earlier, Mr Rosenberg said.

But with real risks in the world economy, and a still weak economic recovery in New Zealand, "even harsher government spending cuts and public service job losses could lead to the recovery faltering", Mr Rosenberg said. "There is no need for this."

The Government's debt situation was mild compared with other developed economies, he said.

The Government's net debt was close to forecast at $25.4b, equal to 13.6 per cent of gross domestic product. By comparison, Greece, which is facing a sovereign debt crisis, has net government debt equal to about 100 per cent of its GDP, with Italy and Japan at similar extremely high levels.

The New Zealand Government could tolerate the moderate debt levels expected to make sure the economy did not return to recession and higher unemployment, Mr Rosenberg said.

New Zealand's gross debt was $685m lower than expected because market conditions limited the amount of government bonds and Treasury bills that were issued.

Treasury Debt Management Office treasurer Philip Combes said it aimed to raise $12.5b in bonds in the last year, but ended up with $12.1b, leaving it slightly under the programme, but they were still well ahead of the initial plan to raise $8.5b.

"There was a little less demand ... in May and June [than expected]," Combes said, because of lower interest rates and perhaps because football's World Cup was on.

Recent concerns about government debt levels in southern Europe saw interest rate yields rise for those risky countries, but fall for "fiscal safe haven" countries, including New Zealand, Australia, Britain and the United States.

"For investors, they are getting lower returns and that lost us a bit of demand [in New Zealand]," Combes said.

On the money market, 10-year Government stock rates had fallen from about 6 per cent to a recent extremely low level of 5.3 per cent, before firming to about 5.5 per cent.

- © Fairfax NZ News