Treasury expecting NZ$300-500 million surplus in 2014/15; Lower than PREFU forecast for NZ$1.45 billion, PM Key says

Treasury is forecasting a lower initial government surplus in the 2014/15 year than estimated before the election, due to developments in the Eurozone, Prime Minister John Key says.

Meanwhile, if the absolute worst happened, and there was a major shock to the global economy, the government would look at whether retaining that surplus target would actually harm the economy by forcing a sharp contraction in demand, Key said.

Treasury's upcoming Budget Policy Statement to be released on February 16 will forecast an initial surplus of NZ$300-500 million, down from NZ$1.45 billion in the Pre Election Fiscal Update (PREFU).

Outlining the government's key priorities for its second term, Key said the 2014/15 surplus track was still expected.

"Today I can confirm that we are still on track to post a surplus in 2014/15, and the budget policy statement will show a forecast surplus in the range of NZ$300 to NZ$500 million in that year," Key said in a press release circulated to media before a speech to the Waitakere Business Club in Auckland.

"Given the events in Europe, this surplus is understandably smaller than was previously forecast. But we remain on our tight fiscal track," he said.

New Zealand was in a relatively good position to deal with any fall-out from the European crisis in the near term, Key said.

"In both 2012 and 2013, the New Zealand economy is forecast to grow more strongly than the Eurozone, the UK, Japan, the United States and Canada - so we are in relatively good shape. However, it is important that we get back to surplus and make our economy more competitive," Key said.

Global economic outlook deteriorated

The global economic outlook had deteriorated since the end of last year, and the European crisis, in particular, was the biggest potential threat to the world economy and therefore to the New Zealand economy, Key said.

“Leading forecasters like the IMF, World Bank and Consensus Economics are expecting world growth to be weaker over the next couple of years than previously predicted. For the most part, that is because of the ongoing turmoil in the Euro area,” he said.

The most likely outcome was that European countries managed through the crisis with the Euro intact, because it was in their collective interest to do so. But that was by no means guaranteed.

“As recently as yesterday, the IMF warned that if the required actions are not taken, the European crisis could spill over into a global recession,” Key said.

“Even under the more likely scenario, where Europe avoids a full-blown crisis, the Euro countries are expected to go into recession in 2012 and will be in for a protracted period of sluggish growth thereafter,” he said.

This poorer growth outlook for Europe had, in turn, contributed to lower growth forecasts for Asia, including China. Overall, growth in China was expected to remain strong, but an easing in that growth would still have a flow-on effect for Australia, because of a lower demand for minerals.

The outlook in the United States is actually looking better than it did late last year, but growth was still likely to be subdued, Key said.

“Weaker global growth, particularly in our key export markets in Asia and Australia, will put downward pressure on the demand for our exports. That will have a real and noticeable effect on the New Zealand economy, which is expected to grow somewhat slower than was predicted at the end of 2011,” Key said.

“But it won’t knock the New Zealand economy for six and it certainly won’t stop the Government pushing ahead with its priorities,” he said.

“We are a small economy doing the right things, our banks are in good shape and the Government has managed effectively through the difficulties of the past three years.”

The really difficult challenges would start to come if world growth continued to be revised further and further downwards, or if the European crisis triggered a global credit freeze.

“Those are not the most likely scenarios for the world economy but they are certainly possible and the Government will continue to monitor global events very carefully,” Key said.

Surplus

The Government wass committed to returning to surplus in 2014/15.

“Sticking to this commitment is an important part of our plan to limit debt and take pressure off interest rates and the exchange rate,” Key said.

“And sticking to this commitment is also important for New Zealand’s credibility with international financial markets. As we have seen overseas, a loss of credibility is very difficult to reverse and can have widespread effects across the whole country,” he said.

“As you’d expect, the forecast slowdown in world growth makes our surplus target harder to achieve. But today I can confirm that we are still on track to post a surplus in 2014/15.”

The upcoming Budget Policy Statement would show a forecast surplus in the range of NZ$300 to NZ$500 million in that year.

“Given the events in Europe, this surplus is understandably smaller than was forecast in the PREFU. But we still remain on our tight fiscal track. You’ll see a fuller picture of that in the BPS, which will be released on February 16. The next update after that will be in the Budget itself,” Keys said.

“The Budget will set out the Government’s revenue and spending, and show exactly what we are doing to meet our fiscal targets, get back to surplus and start reducing debt,” he said.

“If the international outlook worsens between now and the Budget we may have to do more than we are currently anticipating to reach our surplus target, bearing in mind that the target is still three years and many forecast revisions away,” Key said.

“If the absolute worst happened, and there was a major shock to the global economy, the Government would look at whether retaining that surplus target would actually harm the economy by forcing a sharp reduction in demand,” he said.

“But outside that scenario, we remain firmly committed to our target for surplus in 2014/15.”

(Updates with extract from speech, video)