PM Key says can't "indebt" future generations; surplus will be earlier than 2016/17; net debt to peak below 34% of GDP

By Alex Tarrant

Prime Minister John Key says the current generation needs to be responsible with how it manages government debt and not "indebt" future generations.

On TV3's firstline this morning, Key added to comments he made at his post-cabinet press conference last night, at which he said Budget 2011 would forecast wage growth well and truly above inflation and strong employment growth. Key yesterday also hinted that the government would look to return its books to surplus before 2016/17 and that net debt would peak below 34% of GDP, which he confirmed would be the case this morning.

The government is set to announce a deficit before gains and losses of up to NZ$17 billion for the current year to June 30 as it borrows heavily to cover the initial costs arising from the Christchurch earthquakes, a lower than expected tax take due to a sluggish economic recovery, and as it continues programmes such as Working for Families and KiwiSaver, which it has indicated will change on Thursday.

The government will borrow up to NZ$20 billion in the current financial year to cover that deficit as well as pre-funding some of next year's deficit, which is expected to be about half that of this year's NZ$17 billion.

This morning on TV3's Firstline, Key said there was a big upfront cost for the government from the September and February earthquakes in Christchurch. The earthquakes are expected to directly cost the government NZ$5.5 billion over the next four years, with the remainder of the estimated NZ$20 billion costs for the quakes to be covered by private insurance and reinsurance payments.

“There’s really nothing the government can do about that and it presents a lot of costs," Key said about the quake costs.

"And that’s why it’s a zero budget. Most New Zealanders watching this programme will be able to understand somehow we’ve got to go and pay for that shortfall," he said.

'Economic position improving'

Meanwhile, due to the global financial crisis, New Zealand tax revenue had "slowed down," Key said.

"Businesses paid less tax, individuals paid less tax – less overtime etc, etc, and the government’s outgoings - where we pay for unemployment benefits and the likes – because they rose, we pay more," he said.

"Now the economic position is actually improving, both in New Zealand and globally, and we’re very confident that that deficit will evaporate and we’ll return to surpluses and that’s a good news story for New Zealand," he said.

Meanwhile, Key said the government deficit would reduce “very, very rapidly as you get into the new financial year [beginning July 1]".

Key said Finance Minister Bill English would release those figures on Thursday, when the budget is released to the public at 2pm.

“What I can say is, when we came into office, we were presented by Treasury with an outlook which said, ‘You’ll have ten years of deficits and very rapidly rising debt’," Key said.

"Even if we’d just stuck with the programme that we would change things in the last couple of budgets [by increasing spending by NZ$1.1 billion plus 2% for inflation], we still wouldn’t have got back to surplus until 2016/17 and debt would have topped out at 34% of GDP," he said.

Don't want to join the PIGS

"Now what you’re going to see on Thursday is an improved position from there. That’s because the government’s been very proactive, and despite the fact it’s election year, we’re fundamentally going into the budget telling New Zealanders, ‘Look we’ve got to live within our means, we can’t indebt a future generation, we are going to be responsible."

"Yes there’ll be some changes, you won’t love all of them, but hopefully you’ll understand that it’s better that we take a small amount of pain now, than a lot of pain down the track as Portugal, Ireland, Greece and Spain are," Key said.