Treasury has delivered a broadly unchanged outlook for the New Zealand economy in its pre-election fiscal update relative to forecasts in its May Budget, but warned of large downside risks to its latest forecasts due to global market uncertainties.
The PREFU released Tuesday afternoon showed the government returning to a larger-than-forecast surplus in 2014/15, and net core crown debt hitting a lower peak than forecast in the May Budget.
Treasury pushed back its expected timing for when rebuilding in Christchurch would get underway from the first half of 2012 to the second half of the year, but said higher-than-expected costs from the Canterbury earthquakes would mean higher investment and growth in subsequent years due to the larger rebuilding efforts.
That rebuild would help offset the effects of a weaker global economy, Treasury said. Trading partner growth was revised down by about 2% over the next four years due to uncertainties in global markets, particularly in Europe.
The risks to Treasury’s forecasts were skewed to the downside, due to the global turmoil. In its downside scenario presented in the PREFU, Treasury said New Zealand’s nominal GDP could be a cumulative NZ$35 billion lower over the five-year forecast period to the year ending June 2016. Treasury gave a one-in-five chance of this occurring.
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. Its forecasts were finalised on October 11 and the text was finalised on October 18.
“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.
Bigger initial surplus
The government would still return its books to surplus in the 2014/15 year, with the NZ$1.450 billion expected surplus larger than the NZ$1.297 billion forecast in the May 2011 Budget.
Deficits in the three years between now and the 2014/15 year would be slightly larger than forecast in the budget, the PREFU forecasts showed.
An NZ$18.4 billion deficit in the year to June 30, 2011, would fall to NZ$10.809 billion in the 2011/12 year, NZ$4.438 billion in 2012/13, then NZ$943 million in 2013/14 before returning to surplus the following year.
Finance Minister Bill English said the government was committed to reaching surplus in 2014/15, although “not at all costs.” There would need to be a significant change in the global outlook and tax revenue for that track to be pushed back, English said.
GDP growth in the year to March 2012 was forecast to be 2.3% in the PREFU, compared to an expectation of 1.8% in the May Budget. That would be followed by 3.4% growth in the year to March 2013 (from 4% in the Budget), 3.3% in March 2014 (from 3%), and 2.9% in 2015 (from 2.7%). The PREFU then forecast GDP growth of 2.4% in the year to March 2016.
Meanwhile net core crown debt as a percentage of GDP would peak at 29.0% of GDP in the year to June 30, 2015, down from a peak of 29.6% in that year forecast in the May Budget.
Canty rebuild could cost NZ$30 billion
Continuing seismic activity in Canterbury saw Treasury push back its expected timing for rebuilding in Christchurch by 6-9 months to the second half of 2012, while it increased expected costs from the quakes from NZ$15 billion to NZ$20 billion after reassessments of land damage from the Earthquake Commission.
However Treasury warned the damage could end up being much higher than the NZ$20 billion forecast.
The damage estimates represented damage on property, contents and infrastructure valued at current prices, Treasury said.
“They do not include business disruption or additional costs from inflation, insurance administration or rebuilding to higher standards than existed before the earthquakes,” Treasury said in the PREFU.
“These costs are important and their inclusion could lift the total cost to NZ$30 billion or more,” Treasury said.
Big boost to growth
Treasury said the larger-than-expected Christchurch rebuild, combined with a cyclical rise in residential building activity, and the repair of leaky building, would result in the construction sector contributing around 1.5 percentage points to GDP growth in each of the next two years to December 2013 as activity rose to, and maintained a peak in activity.
Doesn't include KiwiSaver soft compulsion
Meanwhile, Treasury said its forecasts did not include the government's announcement on October 18 to proceed with KiwiSaver auto-enrolment from 2014/15, subject to reaching surplus in that year. The 'soft compulsion' policy was estimated to cost NZ$550 million over four years.
(Updates with comment on KiwiSaver soft compulsion costs not included, video of Bill English, reaction from Labour's Cunliffe)
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