Budget 2012 forecasts will show net debt stays below 30% of GDP, despite govt's worsening financial position, PM Key says

Treasury is still forecasting net government debt will stay below 30% of GDP, despite the worsening fiscal outlook, Prime Minister John Key says.

Speaking on Newstalk ZB on Tuesday morning, Key said forecasts in Budget 2012, to be released on May 24, would show the government remained below its self-set debt ceiling.

Budget 2012 would also show the government's deficit "dramatically coming down," Key said. An NZ$18.4 billion deficit in the 2010/11 year is expected to fall to NZ$12.1 billion this current year to June 30.

The most recent set of Treasury forecasts, February's Budget Policy Statement, showed net debt peaking at 29.6% of GDP in the 2014/15 year. Since then, Finance Minister Bill English announced the government's financial position three years out was about NZ$1 billion worse than expected in February.

An expected 2014/15 surplus of NZ$370 million had been revised by Treasury to a deficit of NZ$640 million due to rising earthquake costs, a lower-than-expected domestic tax take, and a slowing global economy.

Despite the revision, the government is still promising to return its books back to surplus in the 2014/15 year by squeezing spending further.

'NZ taking its medicine'

On Newstalk ZB’s Leighton Smith show on Tuesday morning, Key said the international financial environment was "still extremely fragile, if not weak".

Asked whether New Zealand needed to be worried about what happened if Greece left the Euro, Key replied:

“The broader issue is should we be worried about Europe, and the answer to that is, yes."

European countries had a lot of conditions New Zealand policy makers did not want here.

“They’ve got quite an old population, inflexible labour markets, far too much government debt, huge reliance on welfare, inefficient and not competitive economies for the most part – Germany being excluded," Key said.

“And the problem that you’ve got, and this is what’s causing all the issues from France right through to Greece and Spain...and Holland, is that people are voting against austerity. Why? Because austerity brings with it the challenges, and you have to do things that people don’t like," he said.

“My point is, unless New Zealand takes its medicine now, eventually that’s where you end up. And when you end up there, you lose control.”

Key was asked by ZB’s Smith when New Zealand would be taking its medicine, as the government would not raise the Superannuation age, change working for families, or alter interest-free student loans.

“If you go and have a look at what we have done, we have literally spent no new money through the budget process in four years,” Key replied.

“Labour spent the equivalent in that period of time of about NZ$20 billion – NZ$15-20 billion. We came in, they said there’ll be deficits for a decade," he said.

“Wait til you see the Budget numbers, and wait til you see the deficit in the Budget. But what you will see is that debt number tops out at under 30% of GDP and comes quite rapidly down.”

'We have made substantial changes'

The government had been making substantial changes, Key said.

“Very much like yesterday. In the end, we could have taken the proposition of not increasing prescription charges from three to five dollars. We know that that won’t be hugely popular with people," he said.

“But equally, that raises us NZ$140 million we’re putting into cancer care and to more nursing and to better medicines overall. And my view is it’s better to be up front with New Zealanders and say, look, pay a little bit more, but you’ll get a better service. And the equivalent in Australia, seeing as we spend our life talking about it, is they pay A$45 to go to get a prescription or eight bucks if they’re less well off.”

National had borrowed NZ$40 billion since coming to government in 2008. Of that, NZ$13 billion stemmed from costs from the Christchurch earthquakes.

“Australia borrowed A$190 billion in the same equivalent [period of time], and [US President] Obama’s borrowed about US$6 trillion," Key said.