Christmas cheer as economy on a roll

Consumers have been given the amber light - to start spending with caution - after the Treasury forecast an improved outlook for jobs, economic growth and the Government's books.

In its half yearly economic and fiscal update released yesterday, Treasury handed out some Christmas cheer to voters and the Government, forecasting unemployment to fall below 6 per cent next year and continue sliding to 4.7 per cent by 2018.

The economy is tipped to expand sharply to 3.6 per cent - one of the fastest growth rates in the developed world - and the Government's books should be back in the black soon and post a surplus of $5.6 billion in 2018.

National's key political pledge to return to surplus in 2014-15 is still on track, although only by $87m. Finance Minister Bill English admitted it was "not the largest one reported by a government".

But the upbeat forecasts will give him "bragging rights" over his Australian counterpart Joe Hockey, who yesterday abandoned plans to return to surplus by 2016-17 and forecast unemployment to rise, and growth to stall at 2.5 per cent for the next two years.

Mr English said consumers heading into Christmas were looking more confident but they would not get carried away.

"Kiwis have got pretty realistic over the last few years and they know if they overdo it now they will pay for it later when the kids start back at school," he said.

"But why shouldn't they have a bit of confidence? They have been through a pretty tough time and done well and they can see things looking up. I hope they enjoy Christmas. A little bit of confidence is a good thing."

Workers had better job security and reasonable prospects for wage increases. Businesses were more productive and exporters, the construction sector and the service sector were more confident than they had been for 10 years.

Treasury secretary Gabriel Makhlouf said households and businesses were more comfortable with their financial position, "but cautious about spending decisions".

"Growth is becoming more embedded and broad-based, although still dominated by domestic demand."

While the economy was looking rosier, interest rates were heading higher and house price inflation may have peaked.

In 2014 the Government would have $1b to spend on new initiatives, but Mr English said tax cuts were unlikely.

His priorities for a third term would be debt reduction to build a buffer against future shocks, the resumption of payments into the "Cullen" superannuation fund - now forecast to start one year sooner in 2019 - and more spending on priority public services.

The improved outlook will see debt repayment also starts a year earlier, with net debt set to peak at $65b, down from $70b in previous forecasts.

The update showed the partial asset sales programme, now expected to raise between $4.6b and $5b, would have a net cost of about $108m a year to the Government's books.

It showed the sales would save $219m in interest costs, through lower government debt, against forgone annual future profits of $327m.

However, Mr English continued to defend the programme, saying he did not put much store on the forecast profits of "risky commercial companies".

Labour finance spokesman David Parker said with strong terms of trade and the Canterbury earthquake rebuild it was no surprise the economy was growing.

But the Government could not claim the credit.

Most Kiwis were missing out on the recovery and the forecast slim surplus would be achieved mainly by overcharging for ACC levies, after the Government rejected a recommended cut to the vehicle levy.

"Wages are stagnating and job growth is lagging behind economic growth," he said.

When last in office Labour had achieved nine surpluses in a row and left zero net debt.

It was committed to a return to surplus if it won in 2014.