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Government to borrow more as deficits rise, economy slows

Monday 6th October 2008

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New Zealand's government will increase bond sales next year as the economic slump pushes the budget into deficit, according to the pre- election economic and fiscal update.

The Treasury forecast a cash deficit of NZ$5.9 billion in the year ending June 30, 2009, up from the NZ$3.48 billion gap forecast in May, the government. To help fund the deficit, the government plans to sell NZ$4 billion of bonds this year, up from the NZ$3.4 billion forecast in the May budget. Bond sales may rise to NZ$9 billion by 2011.

The forecasts in the prefu, as the document is known, show there's little in the government coffers to fund tax cuts or increase fiscal spending. The National Party, leading in opinion polls, plans to release its tax policy on Wednesday, once it has digested the implications of the state accounts. Government revenue is forecast to be some NZ$900 million less in each of the next three years compared to budget forecasts.

"On the face of it, the next government is in a fiscal straitjacket in terms of what it can, and cannot, do or promise," said Khoon Goh, senior markets economist at ANZ National Bank. "We think there is still some downside risk to Treasury's growth forecast, and therefore their fiscal forecasts as well," he said.

The Treasury now forecasts annual economic growth will slow to just 0.1% in the year ending March 31 from the 1.5% pace it forecast in the budget and growth of 3.2% last March year.

The economy fell into recession in the first half of the year, the first since 1998. The central bank is expected to continue with a series of 50 basis point cuts to the official cash rate, pushing it as low as 6%, economists say.

Gross government debt will rise to 23% of gross domestic product by 2013 from 17% this year, according to the report. The budget cash surplus was NZ$2.1 billion in the year ended June 30.

"Now is not the time for risky or reckless promises of any additional tax bonuses over and above what is already legislated for by parliament," Finance Minister Michael Cullen said.

By Jonathan Underhill

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