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NZ heading for bigger deficits; room to cut rates further

Thursday 18th December 2008

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New Zealand's government finances are heading for wider budget deficits over the next few years on a weaker track for economic growth that will give the central bank more room to cut rates, according to the Treasury's latest forecasts.

Inflation is forecast to be "significantly lower" than forecast in the pre-election briefing, the department said. "As growth in the economy remains weak and the outlook for inflation declines, the Reserve Bank is expected to continue to ease monetary policy."

The government's cash deficit may widen to $6.63 billion in the year ending June 30, about $700 million more than was predicted in October. The gap widens to $8.1 billion in 2010 and keeps widening through 2013, according to the forecast track in the Treasury December Economic & Fiscal Update.

As the economy slows, fiscal stimulus will help underpin the economy, according to the assessment. Increased tax cuts and other initiatives of John Key's government may add 50-to-80 basis points to gross domestic product growth over the next three years, according to economist Shamubeel Eaqub.

"This will be a welcome relief for an economy already in a year of recession and staring down the barrel of further weakness," he said. The government's income tax cuts start in April and "should flow through to the economy relatively quickly," Eaqub said.

The economy probably shrank 0.4% in the third quarter, according to a Reuters survey and an NZIER survey of economists yesterday predicted a decline in GDP in the year to March 31. The global slump has driven down prices of New Zealand's exports, such as dairy products, which have tumbled 43% from their peak in November 2007.

Tax cuts over the next two years will amount to 5% of GDP, or about $9 billion, according to Finance Minister Bill English. Adding further stimulus, English will oversee an accelerated spending program for infrastructure projects such as irrigation, broadband and highways.

The next year's budget for infrastructure development was increased to $1.45 billion from $900 million.

The government plans to sell more bonds in fiscal 2009 as tax revenue slows and spending increases. It raised the size of the sales programme by $500 million to $4.5 billion, and boosted the target again for 2010 to $7.5 billion.

By Jonathan Underhill

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