New Zealand 'on road to recovery'

New Zealand is on the road to recovery after emerging from a "once-in-a-lifetime" crisis in better shape than expected, according to the Government's latest economic and fiscal update.

Figures just released show that projections for growth, unemployment, debt and government deficits have improved since the budget update in June, averting the "decade of deficits" previously predicted, though the Government's books will remain in the red till 2016.

The $50 billion hole left in the economy by the recession has also been revised downward to a $23 billion hole by 2014 - effectively halving previous estimates of the cost to the economy of the recession.

In other changes:

* Treasury now expects unemployment to peak at 7 per cent, before dropping to 4.8 per cent by 2014

* Net debt is now expected to hit $57.5 billion in 2013, compared with estimates of $62.6 billion in the June budget update.

* The economy will contract by 0.4 per cent not 1.7 per cent, as previously forecast.

* The budget will remain in deficit -  $6.7 billion in 2010/11. But it will be smaller than previously forecast - as a percentage of GDP it will be -2.9 per cent in 2012, compared with previous predictions of -5.0 per cent.

But inflation figures are worse than expected, now tipped to rise to 2.5 per cent next year - compared with 2.4 per cent in the budget update - and remaining above 2 per cent throufh to 2013, compared with earlier predictions that it would remain below 2 per cent throughout that period.

Finance Minister Bill English said the revised figures reflected the fact that the global economy had stabilised and the success of significant Government initiatives in the past year to fight the recession.

"However, that does not mean that all of the problems of the recession have passed - risks remain that growth could weaken again."

While unemployment was forecast to peak sooner and lower than previously predicted, it was likely to remain at elevated levels throughout 2010 as the economy improved.

"So the year ahead will remain difficult for many New Zealanders."

The Government's fiscal position also remained challenging.

The Government accounts were not expected to return to surplus until 2016 despite the forecasts assuming long-term spending restraint and an upwards creep in average tax rates caused by increasing numbers of taxpayers entering the top tax brackets.

"There is little room for slippage.

Mr English signalled a cap on government spending as one way to keep the lid on spending growth.