Govt forecasts show political parties in 'fiscal straitjacket'

Tuesday 14th December 2010

Government financial forecasts published today are seen as showing politicians in a "fiscal straitjacket" heading into next year's election.

Expectations for the economy are laid out in the Government's budget policy statement for 2011 and Treasury's half year economic and fiscal update (HYEFU).

Finance Minister Bill English said the Government was still heading for a fiscal surplus in 2015/16, as forecast in the 2010 budget, despite one-off costs including $1.5 billion for the Canterbury earthquake, and slower than expected economic activity.

The operating balance before gains and losses (obegal) deficit is forecast to peak at $11.1b or 5.5% of GDP in the June 2011 year. That is above the 4.2% forecast in the 2010 budget.

Residual cash deficits are forecast to continue for the next five years, peaking in the June 2011 year at $15.6 billion before falling to $4.9 billion in the June 2015 year. Overall, cash deficits total $44.4 billion over the next five years.

Revision to nominal GDP figures, combined with a higher than expected build up of corporate tax losses, resulted in the revenue from tax being lower than forecast at the 2010 budget by a cumulative $3.2 billion from 2011 to 2014.

"Budget 2011 will reinforce the Government's path back to fiscal surplus by 2015/16, and sooner if possible, as the Government plays its own part in lifting national savings and rebalancing the economy," Mr English said.

"This year was always going to see the Government post the largest deficit in the largest cycle, and that is appropriate because it is the way in which the Government has set out to protect New Zealanders from the worst effects of recession."

The forecast deficit was at the "outer limits of the Government's comfort zone", with the obegal deficit expected to halve in the next financial year to about 2.8% of GDP, while the track to surplus was not fundamentally altered because of this year's one-off costs, Mr English said.

ANZ bank head of market economics and strategy Khoon Goh said the near term fiscal position was worse when compared to budget forecasts, but that had been well flagged.

"Belt tightening and reprioritisation will be the feature going forward, with any upside tax revenue surprises going into deficit reduction rather than being spent," he said.

"Heading into election year, all political parties are in a fiscal straitjacket."

The updated fiscal forecasts actually showed a return to obegal surplus in 2014/15, a year earlier than expected, Mr Goh said.

"It would appear that reprioritisation and expenditure restraint will continue to be a key feature over the next few years for the Government to achieve the forecast reduction in the deficit."

Although the Government had committed to $1.12 billion in new money for each budget, the allocation now covered items previously not included, such as demand driven cost pressures. That meant greater pressure on baseline spending.

"Next year may be an election year, but the Government is sending a signal that we should not be expecting a lolly scramble. Such prudence is appropriate, though it remains to be seen whether the political realities will see the Government commit to that," Mr Goh said.

NZPA

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