Govt plans for return to surplus on a knife edge

STATE OF THE NATION: PM John Key's speech reveals a return to surplus in 2014-2015 is a touch-and-go proposition.
STATE OF THE NATION: PM John Key's speech reveals a return to surplus in 2014-2015 is a touch-and-go proposition.

The Government's plans to return to surplus by 2014-15 are now on a knife-edge after Prime Minister John Key today confirmed the books would be in the black by less than $500m.

Before the election the Government was forecasting a $1.57b surplus for 2014-15, but Key said that next month's Budget Policy Statement would cut that to between $300m and $500m.

Key said the global outlook had deteriorated, and the European crisis was the biggest potential threat to the world economy - and therefore to the New Zealand economy.

But the most likely outcome was that European countries would manage through the crisis with the Euro common currency intact.

But that was by no means guaranteed and this week the IMF had warned that if the necessary actions were not taken, the crisis could spill over into a global recession.

Key said even under the more likely scenario, where Europe avoided a full-blown crisis, the Euro countries were expected to go into recession in 2012 and face a protracted period of sluggish growth.

The flow on through China and Australia would lower demand for New Zealand's exports.

"That will have a real and noticeable effect on the New Zealand economy, which is expected to grow somewhat slower than was predicted at the end of 2011. But it won't knock the New Zealand economy for six and certainly won't stop the Government pushing ahead with its priorities."

Key said the really difficult challenges would start to come if world growth continued to be revised further and further downwards, or if the European crisis triggered a global credit freeze.

The commitment to returning to surplus by 2014-15 was an important part of the plan to limit debt and take pressure off interest rates and the exchange rate, but was also important for credibility with world financial markets.

If the outlook worsened between now and the May Budget the Government may have to do more than currently planned to reach its surplus target.

"If the absolute worst happened, and there was a major shock to the global economy, the Government would look at whether retaining that surplus target would actually harm the economy by forcing a sharp reduction in demand. But outside that scenario, we remain firmly committed to our target for surplus in 2014-15."

Key outlined four key priorities for his Government's second term.

- Responsibly manage the Government's finances

- Build a more competitive and productive economy

- Deliver better public services

- Rebuild Christchurch

''The next three years will be about rebuilding and strengthening the country. We are in a good position to do that compared to a lot of other nations.''

The Budget Policy Statement, to be released on February 16, would update the expected progress towards a return to surplus in 2014/15 - something National had campaigned on.

''Given the events in Europe this surplus is understandably smaller than was previously forecast. But we remain on our tight fiscal track,'' Key said in a speech to a business audience in Auckland today.

He said New Zealand was in a relatively good position to deal with fall-out from the European crisis in the near term.

In 2012 and 2013 this country's growth was forecast to be higher than in the Eurozone, the UK, Canada, the United States and Japan.

''So we are in relatively good shape.'' 

He said the Government would have a busy agenda in this term, including major welfare reform, efforts to raise achievement in the education sector, improve health services and bring in laws to strengthen sentencing, parole and bail laws.

"On top of these initiatives we are taking a hard look at the way public services are organised across the board. The state sector could do much better at achieving results and delivering value for money."

He would release a "Better Public Services Advisory Group" report in the next month or two.