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Budget deficit to rise this year, return to surplus later

Thursday 17th March 2011

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This year's operating budget deficit could blow out to more than $16 billion dollars, or 8% of gross domestic product (GDP), from the $11.1 billion forecast because of the Christchurch earthquake and other factors, Finance Minister Bill English said today.

He told the ANZ Capital Markets Conference in Wellington that as a result, net Crown debt could exceed 30 percent of GDP by June 2014, which is up from around 28% forecast in the December half-year update and up from around 14 percent in June 2010.

The Government wanted to return to a budget surplus in the 2015/16 financial year when it had intended to be in surplus by 2014/15.

"Meeting the Government's share of the immediate earthquake costs will require a quite substantial front loading of Crown debt in the next year or two," English said.

He said it was important that Crown debt returned to pre-earthquake levels "so we can absorb future economic shocks when they come along - as they surely will".

He also moved to hit down suggestions that the rebuilding of Christchurch will stop infrastructure projects in other cities.

"Major projects the Government has already committed to will not be deferred -- they have proved their economic worth and can't simply be switched on and off. Which projects we undertake ultimately depends on their costs and benefits. These will not have changed much due to the quake," he said.

The cost of the earthquake would essentially be borne by the Government's balance sheet, rather than by cutting operating spending or increasing taxes.

"In practice, that will mean both taking on more debt and redirecting some projected capital spending towards Christchurch."

English said the economy had the capacity to absorb the impact of the quake.

"The Reserve Bank last week forecast GDP growth to peak at over 5 percent in 2012 and unemployment to fall below 5%, but 90-day interest rates rising to only 4.6 percent. That forecast combination of high growth and moderate inflation would be good for our export industries and should contribute to a material rise in New Zealanders' living standards," English said.



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