Finance Minister Bill English may cap Government spending even as the recovery pumps billions of extra dollars into the Crown's coffers.
The Treasury's half-year economic and fiscal update yesterday provided the best economic news in a year, confirming the end of the recession and pointing to brighter prospects.
The Treasury said the economy was "on the road to recovery" as the world pulled out of the deepest recession in 60 years.
Unemployment is now expected to peak at 7 per cent midway through next year – about 1 per cent below expectations and equivalent to 17,000 fewer people on the unemployment benefit.
Employment is faring better than expected, with 64,000 fewer jobs predicted to be lost by September next year.
The economy shrunk by a quarter of the figure predicted during the recession and is expected to rebound more strongly, reaching 3.2 per cent growth by 2012.
Next year's forecast deficit has been slashed by $2.5 billion to $6.7b and is expected to be $3.5b lower than forecast in 2012. The country is still tipped to be in deficit until 2016, but the "decade of deficits" predicted last year has been cut to seven years.
The growing economy means the Government is likely to rake in $7b more in taxes than expected over the next three years.
The upturn means the "$50b black hole" – the amount of money English said in the Budget would be lost from the economy over the next three years because of the recession – has shrunk to a $23b hole.
Labour says the upturn in the accounts proves the Government was scaremongering about the state of the economy early this year.
"The Government was very happy to use very conservative numbers to prepare new Zealanders for the worst. That hasn't happened," said finance spokesman David Cunliffe.
Prime Minister John Key said the Government had been reflecting the Treasury's fear that "the wheels were going to completely fall off the New Zealand economy".
"What the Treasury is saying is there is light at the end of the tunnel," he said.
But the upturn is not yet enough to pull back spiralling government debt, which still will see the amount taxpayers collectively owe quadrupling to $64b by 2014.
English said cutting debt was a priority. He said the Treasury forecasts were "a little better", but that did not mean the challenges facing the economy were over.
The Government remained committed to a new spending limit of $1.1b and was investigating a total spending cap, English said.
Total Crown spending is expected to reach $65b this year and rise by about $3b each year.
"Demand-driven" expenditure such as health and education, benefits, superannuation and KiwiSaver payments are not currently included in the Government's sinking lid on public spending.
Under a total cap, any increases in expenditure would have to be offset by cuts in other areas or approved by the Cabinet. English said he was looking at "better and more coherent methods of knowing where spending is occurring and what the alternatives are".
The Netherlands and Sweden had spending caps, he said. "We'll be talking more about that in Budget 2010."
- © Fairfax NZ News
What would make you feel safer about cycling in Christchurch?Related story: Student's death 'so bloody sad'