By Bernard Hickey
Finance Minister Bill English has revealed a sharp deterioration in the immediate budget outlook and an increase in foreign borrowing because of slower economic growth and higher costs linked to the Christchurch earthquake.
Treasury forecast the budget cash deficit for the current 2010/11 year would rise to NZ$15.6 billion or 7.7% of GDP from NZ$9.0 billion the previous year, before declining to a deficit of NZ$4.9 billion in the 2014/15.
However, the government's operating balance before gains and losses (OBEGAL) is expected to rise to NZ$11.1 billion or 5.5% of GDP in 2010//11 from NZ$6.3 billion in 2009/10.
The Government announced that it had increased the borrowing programme for the current year to NZ$13.5 billion from NZ$12.5 billion and forecast a gross increase in borrowing over the next three years by NZ$10.5 billion from its May 2010 forecast.
This increase in borrowing relates to larger than expected cash deficits over the period of NZ$3.8 billion, NZ$1.2 billion from the Earthquake Commission selling bonds to pay for the Canterbury Earthquake, the pre-funding of an April 2015 bond and a larger increase in the 2013 bond issue of NZ$2.0 billion.
English said the deficit was at the outer boundaries of what the government wanted, but that it was still on track to bring the budget back to surplus by 2015/16.
He said the government could not afford a 'lolly scramble' during election year, but had rejected advice that it needed to introduce interest on student loans and cut pensions.
English said the budget deficit track was at the outer limits of the government's comfort zone, meaning it would struggle to handle another earthquake or recession.
He said reiterated the government's May 2010 committment to reprioritse around NZ$2 billion of spending and to limit new spending initiatives to NZ$1.12 billion.
“In each of the past two Budgets, we have identified about $2 billion of spending and redirected it to higher priority frontline services such as health, education and keeping communities safe. We expect to reprioritise a similar amount of spending in Budget 2011," English said,.
The Government remained committed to rebuilding a fiscal buffer against future shocks by keeping net debt below 40 per cent of gross domestic product and returning it to below 20 per cent by the early 2020s, he said.
Higher peak in net debt
The mid-year budget forecast showed net public debt peaking at 28.5%, rather than the 27.5% forecast in the May 2010 budget. However, the net foreign deficit for the nation is expected to be better than forecast in the budget because of better than expected commodity prices.
Budget 2011 would continue to keep new spending initiatives within a NZ$1.12 billion annual operating allowance and a NZ$1.39 billion capital allowance.
Several important reviews would feed into the Government’s economic programme in 2011, he said. They included reports from the Welfare Working Group and the review of spending on policy advice, along with the Government’s responses to the Housing Shareholders Advisory Group report.
“But unquestionably New Zealand’s most significant economic challenge is increasing national savings and reducing our heavy reliance on borrowing from overseas lenders,” English said,
“This unsustainable imbalance is New Zealand’s biggest vulnerability and it means we pay higher interest rates and our exporters’ returns are squeezed by a higher dollar. The Government can certainly play a role in creating an environment that encourages more saving and less borrowing," he said.
"We have made a start in this area with the tax package in Budget 2010. The Savings Working Group is due to report back next month and the Government will consider its recommendations carefully. I would expect any policy responses in this area to be included in Budget 2011."
“With New Zealanders paying down debt and spending a bit less, economic growth is currently slower than we have seen after previous recessions. But we are building a more solid foundation for sustainable growth in the future."
See the full news conference presentation by Finance Minister Bill English here,.
The full budget policy statement is here.
The full half year economic and fiscal update.
Meanwhile, the government also released its first investment statement. See the full statement here.
Reaction:
Business Roundtable executive director Roger Kerr said a drought or a financial crisis were downside risks for the budget.
The underlying problem is excessive government spending, which risks putting unnecessary pressure on monetary policy and the exchange rate A striking point is that the projected path of core Crown expenses as a share of the economy is higher in each year out to 2014 than in any year under the previous government.
This calls for stronger legislated spending disciplines and a willingness to reexamine major spending programmes. The accompanying Investment Statement also signals the need for the government to reprioritise its asset management and in particular to divest commercial assets that belong in the private sector.
The government has rightly stated that it will not alter commitments it has made on spending programmes and asset sales without seeking an electoral mandate. “In the interest of boosting growth and reducing economic risks, that is a course it should now follow."
See reaction from politicial parties here, including Labour, the Greens, ACT and John Key in this piece titled 'Don't Panic', Key says.
(Updated with more detail, quotes from English, Reaction from Business Roundtable links to full document.)
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