Bloomberg News

New Zealand Plans ‘Belt Tightening’ to Achieve Budget Surplus

October 11, 2011

Oct. 11 (Bloomberg) -- New Zealand’s government plans further cuts to public service spending to achieve a budget surplus within four years amid rising earthquake recovery costs, Finance Minister Bill English said.

“There’s plenty of belt tightening to come over the next three or four years,” English told reporters in Wellington today. “The squeeze is coming harder on the public sector. I would expect job numbers will continue to shrink because the budgets are going to get tight.”

Prime Minister John Key, who faces an election on Nov. 26, is cutting spending and expects last year’s income and company tax cuts will encourage growth and job creation, steering the budget to surplus by 2014-15. The economy has been boosted by rising domestic demand and higher export prices, which improved company profits and household incomes in the year through June, Treasury said in the annual financial statements today.

“If a return to surplus in the next four years remains the goal, we would need to see either stronger economic growth projections, or even more belt tightening than was set out in the budget,” said Dominick Stephens, chief economist in Auckland at Westpac Banking Corp.

Christchurch has been devastated by earthquakes, including a February temblor that killed 181 people and closed the central business district. Rebuilding is expected to boost growth in 2012 and beyond.

The economy may also to be spurred by the purchases of an estimated 95,000 foreign fans attending the Rugby World Cup which began Sept. 9. The central bank has forecast visitors will spend at as much as NZ$700 million before the tournament ends Oct. 23.

Rugby Spending

Purchases on debit, credit and store cards at retail outlets rose 0.4 percent in September from August, Statistics New Zealand said today in Wellington.

“We had expected that sales turnover would have received an added boost last month” from rugby fans, said Helen Kevans, an economist at JPMorgan Chase & Co. in Sydney, in an e-mailed statement. Still, “ripple effects of the World Cup along with expectations that interest rates will remain at record lows, will lift sales turnover in October and into year-end.”

New Zealand posted a record budget deficit of NZ$18.4 billion ($14 billion) in the year needed June 30, wider than the NZ$16.73 billion gap forecast in the May budget, according to financial statements today. About half the shortfall was costs and liabilities from earthquakes in the South Island city of Christchurch, which were more than first estimated.

“When you strip out earthquake costs, underlying fiscal management is pretty good,” English said. “We’ve controlled government expenditure better than expected and tax revenue is a bit higher, so we’re pretty confident we can halve it this year, halve it again next year and get into surplus by 2014-15.”

More Taxes

Today’s government statements don’t contain fiscal forecasts or revisions to the bond sales program, which will be published in a pre-election update on Oct. 25.

Tax revenue rose by NZ$813 million from the year earlier to NZ$51.56 billion, better than the May projections, Treasury said. Total government expenses rose by NZ$18.9 billion, of which more than two thirds was earthquake related.

The state-owned Earthquake Commission’s liability estimate rose to NZ$7.47 billion from NZ$3.05 billion in the budget, the Treasury said today.

The government is raising levies that fund the commission from Feb. 1, because the current charge imposed on home owners is insufficient to meet long-term costs. Homeowners will pay 15 cents per NZ$100 of insurance cover, up from 5 cents.

Earthquake Cost

“This is just part of the wider community sharing the cost of the earthquake,” English told reporters. “It will put a bit more pressure on some homeowners who are fully stretched on servicing their mortgages. To shore up the EQC’s finances it’s an extra bit that households will be able to handle.”

In addition to the commission’s liability, costs including social assistance, purchase of condemned houses and support for troubled insurer AMI Insurance bring the total earthquake bill, net of insurance proceeds, to NZ$9.09 billion, Treasury said. More expenses are still to come, the department said.

“It’s not hard to believe there’s risks there and if they eventuate we’ll cope with them,” English said. “We’ve handled a big lump already, if there’s a few more small lumps I think we can handle them.”

--Editors: Malcolm Scott, Benjamin Purvis.

To contact the reporter on this story: Tracy Withers in Wellington at

To contact the editor responsible for this story: Stephanie Phang at

Toyota's Hydrogen Man
blog comments powered by Disqus