PM Key says NZ Government would delay move to surplus beyond 2014/15 and borrow more if Euro crisis worsens considerably

PM Key says NZ Government would delay move to surplus beyond 2014/15 and borrow more if Euro crisis worsens considerably

Prime Minister John Key has acknowledged the European debt crisis may prove worse than Treasury's Budget 2012 forecasts and the government would then choose to borrow more and delay its return to surplus from 2014/15 if the crisis worsened considerably.

Treasury told the government its economic forecasts in Budget 2012 were still their best judgement on where the New Zealand and world economies were headed, although the risk of a worsening situation in Europe had increased since the forecasts were finalised, Key told a post cabinet news conference in Wellington.

The economic forecasts for the May 24 Budget would have been finalised near the end of April, before a failed Greek election on May 6, and an anti-austerity vote in France's Presidential election.

Spain's borrowing costs have risen to unsustainable levels during May, and local data here has come in on the sluggish side. Unemployment unexpectedly jumped to 6.7% in early May, and the prices of dairy commodities sold at Fonterra's on-line auctions have hit a three-year low.

Speaking at his post-Cabinet press conference on Monday afternoon, Key said it was still too early to tell whether the latest concerns about Europe were just a temporary negative blip like those Treasury was incorporating into its forecasts. This happened at the end of 2011, before markets recovered again in the new year.

The forecasts already factored in a sharp recession across Europe.

However the risk of something worse happening in Europe had been increased by events during May, he said.

Key said the government would consider pushing its 2014/15 surplus track back if the European situation deteriorated considerably.

Asked whether the government would look to cut spending further if the crisis intensified, or whether the government would be prepared to borrow more if it had to extend the surplus track, Key said the government would likely borrow to bridge deterioration in tax revenue, rather than cutting schemes like Working for Families.

He said the Budget's main forecasts would show a small surplus in 2014/15. The size of the deficit in 2013/14 could be a positive surprise to Budget watchers, he said.

Greek elections, Spanish banks

Key noted developments over recent weeks in Europe had increased uncertainty in global markets.

“Anti-austerity parties are expected to do well in the second Greek elections in June, and the Greek banking system is under considerable pressure. Concerns are also growing around the Spanish banks, which were downgraded last week, and the Spanish government bond yields have been rising very sharply," Key said.

However it would be unwise to rush to judgement in terms of Treasury's forecasts, and whether they would now be out of date due to the events during May.

“We always knew that Europe would have its ups and downs. It’s important to differentiate whether these events are one of the downs we all expected, or whether they constitute something more fundamental," Key said.

“Volatility is of itself nothing new. You might recall that there was a real sense of crisis in Europe late last year, but this settled down in the new year as European government’s responded. So we have to see how things play out over a slightly longer period of time," he said.

“The advice we’ve had from Treasury is that the main Budget forecasts which you will see on Thursday remain its best judgement in the face of uncertainty about where the New Zealand economy is going. Those forecasts already factor in a good deal of weakness and volatility in Europe, including a sharp recession across the Euro area. However, it’s true to say that the risk of something worse happening in Europe has increased, even if the central scenario remains the same. So we are closely monitoring developments.”

If financial markets did tighten up, it was hugely important New Zealand was seen as a 'good risk,' Key said. The government was taking a responsible path of fiscal management by committing to a 2014/15 surplus.

If the crisis does worsen.....

Asked how the government would react if the European crisis worsened to a point where it had to either cut spending further or take on more debt, Key said the government had proven it could alter its course depending on the circumstances it faced.

“I think New Zealand certainly is in a vastly stronger position than it was back in 2008 when we became the government. But ultimately I don’t think we would, if we were required, tremendously change our spending patterns. What is more likely is that we’ll have less revenue – that will be the impact of an economic slowdown,” he said.

Asked whether the government would make cuts to policies like Working for Families, interest-free student loans or KiwiSaver, Key said, “that wouldn’t be my intention as I stand here today.”

“What would be more than likely to happen would be, there would be an economic slowdown, which would slow down the tax revenue we’ve got, and we might bridge that for a bit longer," he said.

“Overall, we’ve been very reluctant to aggressively go after those areas because we think New Zealanders rely on them. We think we’ve done the right thing."

Pushing the surplus back

While he wouldn’t be happy to push back the 2014/15 surplus target, Key said that might be beyond the government’s control if it resulted from a significant global slowdown. The government would not just cut spending for the sheer sake of reaching that target.

“But equally, the government’s been very focussed on trying to get back to surplus. And I think for very good reason. If there is further weakness in Europe, following the prescription the National-led government has is absolutely the right one," he said.

“We want to be on that list of countries that is seen as a good risk. That’s exactly the position that we’re in at the moment – our bond yields are coming down, it’s cheaper for New Zealand to raise money, and it’s cheaper for our companies and individuals to raise money. The last thing we’d want to do is abandon that target unless we really had to.”

Asked why the government was not borrowing more now seeing as its bond yields were so low, Key replied noted New Zealand’s high levels of private sector debt.

“We’ve made considerable assurances to the rating agencies that we intend to get back to surplus by 2014/15, and I don’t think it’s in New Zealand’s best interests to be borrowing money unless we absolutely need to,” he said.

Key noted his comments made in January that if the government needed to delay return to surplus, then it would be prepared to do so.

“But I don’t think that’s the situation we’re facing at the moment. I can’t be sure the way things unfold in Europe. But I will say we’ve been at this sort of situation before. We had it with the inability to renegotiate the new debt ceiling in the United States. We had it in Europe late last year," he said.

“Of course things could get a lot worse. But equally, this may be yet another storm that blows over.”

The government had not seen anything in its forecasts that showed the economy heading back into recession. Commodity prices were still relatively high, and the falling exchange rate was helping in that regard. Asia and Australia were still strong markets for New Zealand, and there was domestic stimulus from the Christchurch rebuild.

“So it’s always possible, but we’re in much better shape than most others.”

(Updates with quotes from Key)

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Visions PM - not excuses !
When ordinary people from the NZpublic make better, more accurate economic/ financial forecasting then you PM, do you think you are in the right position ? How much longer do you use stupid, smiley excuses for your failure and some of your ministers ?
PM – when will the government give incentives to the potential of our good educated youngsters, the skilful and experienced wider NZpopulation to help establishing new, diverse industries in order to reduce the account deficit and unemployment ?
PM – when do we see  productivity in the real economy, decent jobs for the wider NZpopulation and less quality imports, manufactured by foreign workforces - costing billions ?
PM – are we now a 100% NZclean and green country – in support of tourism and most important quality branding in favour of most other industries or do we go dirty like most other countries, spending billions on cleaning up the mess on many fronts – what is your strategy ? What I see is a patchwork strategy - losing the plot.

Good questions. The face in the photo now seems almost to reflect a realisation that they don't have a clue.
Having said that, more deep fiscal cuts are almost certainly not the answer in what still are recession like conditions in NZ; nor are tax increases. Which means a deficit, whcih needs to be funded. If there is plenty of money in NZ, then borrow from NZers. If there is a deficit of money here, then follow the lead of the US, Swiss, British, Japanese, and even Europeans, and print money. Most definitely do not sell prime assets, or borrow offshore, or the answers to your other questions will generally be at least three years until we can get a half decent government; as there is no strategy now, other than borrow offshore Greece like, and hope noone notices for 3 years.

The Irish still own their Airports, alot of their power assets and have actually dragged the chain on asset sales.
The may sell some power stations but will retain the power distribution.
These guys are bankrupt and have the pressure of the ECB, IMF and World Bank. Yet they still have the guts to say no, these assets are core to our future and won't be sold!
John Key has little but dogma and some kick backs from his mates to justify the asset sales.

You're in luck, Fox.  Mr Key thinks Ireland's example is a model for all developed nations.  Oh wait, sorry, that was only the dumb stuff they did.

Yes well we couldn't possibly cut WFF could we??..Debt slaves might not be able to pay their mortgage/rent and the housing bubble might start to quiver!

Im pretty sure NZ has front loaded debt, so how much and how long do we have beofre we either have to get more debt, default, or print?

Steven - a glimpse of the uncalled upon front loading of government debt issuance can be viewed here. The latest figure is NZD 6,573 million under the 'Government Deposits' catergory. Notably, lent to the local banks at ~OCR +25bps.
To be fair the NZDMO are positioning for the redemption of the NZD 11,270 million, 6.50%, 15/04/13, NZ Government Stock issue.
So maybe not much wriggle room.

Not sure on how many months we'd survive without access to debt markets...3? 6?  I would hope we'd have at least 4 to 6 months....

the tinker with their budget causing maximum disruption for little return in savings, education, Minstry of foreign affairs...what 150 million in savings so fare.... good grief!!

How about sharing with the taxpayers your longer term plan for the economy. Mr Key?
Assuming you have one?

...... keep the amount stolen from the productive sector in taxes in balance with the amount given to the welfare sector in bribes ...... such that he can win the 2014 election before the country actually goes bankrupt .......

If you have a job or operate a business , you are paying to see the jugglers & the clowns .... the most expensive circus in town ......

Key totally lacks integrity.
Last year he stated several times that NZ was largely de-coupled from Europe, and mainly tied to the success of Asia and Aus
Now he says that Europe's problems are causing big uncertainties in financial markets which are affecting the whole globe 

“Volatility is of itself nothing new. You might recall that there was a real sense of crisis in Europe late last year, but this settled down in the new year as European governments responded. "
The people that matter (the unemployed and the working population of Europe),didn't calm down they were and are up sh!t creek.  Granted, the MARKETS calmed down, and our media faithfully reported this as what was going on in the real world.
We still haven't learned: What happens in the market is not the real world for most people.

Yep, agree