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Last updated 09:40 15/06/2012

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Reserve Bank Governor Alan Bollard has dealt a blow to the Government's hopes of returning to surplus by 2014/15, with a new forecast tipping the books will not be back in the black until two years later.

Prime Minister John Key yesterday conceded the bank was using "slightly more up-to-date data" than the Treasury used in the May 24 Budget.

These were "volatile and uncertain" times but the Government believed it was on the right track.

"It is an extremely difficult time to be forecasting," he said.

The Government would not change tack but would work hard and see what the global economy delivered.

"There is nothing different we would want to do at this time."

The Reserve Bank is forecasting a deficit of 1.1 per cent of GDP, or about $2.5b, in the year to March 2015, compared to Treasury's $200m surplus tip for the year to June 2015.

The bank yesterday held the official cash rate at a record low 2.5 per cent in its June monetary policy statement, saying the economic outlook had weakened a little since its previous statement in March.

Key said the bank was forecasting lower world growth and lower prices for this country's exports.

He said the upcoming Greek and French election could put a "different lens" on the world, and the impact of troubles in Europe would flow through to China, Australia and on to New Zealand.

Appearing before Parliament's finance and expenditure select committee, Bollard agreed the delayed return to surplus would see government debt rise about $10 billion higher than currently forecast.

He said the economic outlook in Europe was so unclear it was not worth putting into a model.

"Instead it is the risk in the room."

In a generally down-beat assessment of the economy, the bank said the outlook for the country's trading partners had worsened and there was a small but growing risk that conditions in Europe would deteriorate more than expected.

Households and businesses had tightened their belts, especially on major purchases.

This cut in capital investment was having an immediate negative impact on growth, but it was also curbing the economy's future capacity to expand.

A cautious approach to borrowing and lending had limited innovation and risk-taking, further inhibiting potential growth which the bank said had slipped to 1.2 per cent a year from just over 3 per cent in 2001.

It is tipping growth of 2 per cent in the year to next March.

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- © Fairfax NZ News

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