Prime Minister John Key is sticking to the line that the government may be able to return its books to surplus earlier than the 2014/15 track outlined in Treasury’s forecasts, despite Treasury highlighting yesterday a one-in-five chance of considerably lower growth over the next five years.
Speaking to a senior citizens group in Kapiti on Wednesday, Key said the numbers released by Treasury in its pre-election update yesterday were “pretty good.”
The government was looking to return the books to surplus in 2014/15, or "maybe slightly earlier," Key said.
Yesterday’s PREFU release forecasted a government operating deficit before investment gains and losses of NZ$943 million in the 2013/14 year, before a NZ$1.450 billion surplus in 2014/15.
'We have a plan, but not for the downside'
Speaking to media after the meeting, Key was asked whether the downside scenario in the PREFU meant his desire to reach surplus before 2014/15 was more unlikely. Treasury's downside scenario in its forecasts (it gave no upside scenario) showed GDP could be NZ$35 billion lower over the next five years if the European sovereign debt crisis was not sorted out, and global growth was lower than expected. Treasury gave a one-in-five chance of the downside scenario occuring.
“The truth of it is we live in very uncertain, volatile times. We have actually for the last three years," Key said.
“What I think is the important point here is to have a plan. We have a plan, and we have a single focus on trying to get back into surplus. That’s why we ran a zero budget [in 2011], despite the fact that half of our entire deficit for 2011 was tied up with the earthquakes,” he said.
Despite there being the downside scenario, the “burden of proof” for the government’s actions was there was a four-out-of-five chance of the downside not happening.
“At the end of the day, governments react. In 2009 we actually cancelled our tax cuts that we campaigned on. It was a very hard decision for me to personally make, because I had campaigned vigorously on that. But I went to the New Zealand public and said, look I just don’t believe it’s affordable in the conditions we’ve got," Key said.
“People can always change their position. But you’ve got to do that in good faith. What we campaign on is what we believe, but we’re campaigning fundamentally on a very, very, very austere programme. We’re not talking about having a capital budget, because fundamentally we’re releasing capital from the mixed-ownership model," he said.
“We’re talking about a new budget spending component which is fundamentally about a third to a quarter of what Labour was spending in their last years. We’re talking about massive reprioritisation of money within the public sector as we have before.”
Asked whether it would be responsible to outline to voters what path the government would take if the economy did move toward the downside scenario, Key replied:
“I think you’d have to see what ultimately went on. Let’s see. Treasury’s factored in what they think is the best indication of global growth, and that’s actually mirrors the IMF.”
See Bernard Hickey's call for the major political parties to highlight 'back-up' plans in the run-up to the November 26 election for if the economy moved toward what was forecast in the downside scenario.
'Let's see on Europe'
Meanwhile, it was “let’s see” on the economic situation in Europe as major developments there came daily.
Events overnight worried markets after a Finance Ministers’ meeting of the major European economies was cancelled, and as leaders remained divided on how to deal with the situation there. See more in Bernard Hickey’s 90 seconds at 9am here.
In the PREFU document, Treasury said it assumed European governments would manage the region’s debt crisis and stabilise financial markets.
“The greatest uncertainty is associated with the euro area sovereign debt crisis, which we expect to be resolved only gradually, with risks around key developments,” Treasury said in the PREFU.
“The outcome of meetings of European leaders scheduled to occur between the finalisation of this text and its publication, and in the period closely following publication, could change the outlook for the euro area and the global economy,” Treasury said.
Treasury finalised its ‘specific fiscal risks’ in the PREFU, and the document’s text, on October 18, a week before the PREFU was released on October 25.
Treasury’s economic forecasts and economic data were finalised on September 26. Tax revenue forecasts were finalised on September 30, and fiscal forecasts were finalised on October 18.
(Updates with quotes from Key, background from PREFU, second video of Key on PREFU downside risks)