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Govt forecasts stay the course in pre-election update

Tuesday 25th October 2011

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The government’s growth forecasts for the next five years are largely unchanged in its pre-election update from the May budget, though the latest bout of global jitters has thrown up a number of risks if the world economy goes pear-shaped.

The Treasury has kept its estimate the government’s books will return to an operating surplus by 2015, even as gross domestic product grows more slowly than earlier expectations.

Finance Minister Bill English told a media briefing in Wellington that comes down to a clamp down on Crown expenditure, lower interest rates, and a pick-up in employment likely to reduce transfer payments by more, even as tax revenue fails to improve as fast as forecast.

“Government spending is just beginning to fall as a percentage of GDP, and our external liabilities, the most significant vulnerability, has fallen from 85 percent of GDP to 70 percent,” English said. “By international standards it’s still too high and it will take some time to get down to satisfactory levels.”

The smoother track of Treasury’s forecast will help allay fears last month’s double downgrade of New Zealand’s sovereign credit rating derailed the country’s economic recovery, which has been putting a lot of stock in the delayed Christchurch rebuild effort.

However, the rebuild is expected to start later and take longer than previously forecast, with the Treasury now expecting building work to peak in 2013 and to cost $20 billion, compared with $15 billion estimated in May.

Treasury said the downgrades aren’t expected to have much impact on the interest costs for the government, as global rates hold near zero in the extended fall-out from the 2008 financial crisis.

The Treasury expects average annual economic growth of 2.9 percent between 2012 and 2016, with the jobless rate falling to 4.7 percent from its current 6.5 percent.

The government’s operating balance excluding gains and losses is forecast to drop to a deficit of $10.8 billion in the 2012 year from this year’s $18.4 billion deficit, narrowing to a shortfall of $4.4 billion in 2013, $900 million in 2014, before climbing to a surplus of $1.5 billion in 2015 and $3.1 billion in the black in 2016.

Still, the government is forecast to run cash deficits throughout this period, falling to $1.6 billion by 2016 from this year’s $13.3 billion shortfall.

Those deficits will be funded by an increase in net debt, which is expected to peak at 29 percent of GDP in 2015. The Debt Management Office kept the 2011/12 programme unchanged at $13.5 billion, and increased the maximum tranche size for 2013 and 2015 bonds to $12 billion from $10 billion.

The DMO also said it will delay issuing a 2025 inflation-indexed bond until the second half of the 2011/12 fiscal year.

Treasury said surpluses won’t be big enough to resume contributions to the New Zealand Superannuation Fund until 2018, almost a decade after the government suspended injecting cash into the pension fund. Still, the fund’s net assets are forecast to grow to almost $25 billion by 2016.

In the medium-term projections, the department issued yet another warning about the cost of an ageing population, with superannuation costs likely to increase to 6.1 percent of GDP by 2026 from the current 4.4 percent.

BusinessDesk.co.nz



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