Bloomberg News

New Zealand Forecasts Wider Surplus in Run-Up to Vote Next Month

October 25, 2011

Oct. 25 (Bloomberg) -- New Zealand’s government is forecasting the record budget deficit will vanish within four years as leaders seek to convince voters ahead of next month’s election their economic management is superior to opponents.

“All parties have to demonstrate how they will get to surplus, that’s the bottom line,” Finance Minister Bill English told reporters today, after releasing a fiscal update in Wellington less than five weeks from the Nov. 26 election. “We’ve shown a track record around managing shocks because we’ve had our fair share of them.”

Prime Minister John Key is pursuing a second, three-year term as the economy recovers slowly from a recession and the global financial crisis, while an earthquake that killed 181 people in Christchurch caused a budget blowout. Standard & Poor’s cut New Zealand’s sovereign rating one notch to AA last month, citing rising foreign debt and weak fiscal conditions, which may prevent the government from making promises to boost spending or cut taxes.

“There is little room for fiscal slippage,” said Khoon Goh, head of market economics and strategy at ANZ National Bank Ltd. in Wellington. “A return to surplus will require expenditure restraint.”

Key was preferred as prime minister by 59 percent of voters polled by research firm Colmar Brunton in late September and his National Party had 56 percent support. The main opposition Labour Party had 29 percent backing in the poll of 1,800 voters, and its leader Phil Goff is preferred as prime minister by 8 percent of respondents. The survey had an error margin of 3.1 percentage points.

Tax Cuts

The National Party in the 2008 election campaign pledged income- and company-tax cuts that it had to delay as the nation entered its worst recession in 30 years. The tax cuts were introduced in October 2010 and the government also committed to cutting its own spending.

“We are committed to the surplus,” English said today. “I don’t think there will be any part of government that will be unaffected by the need to focus on better services for less costs.”

The government today forecast a surplus of NZ$1.45 billion ($1.2 billion) in the year ending June 30, 2014. That compares with a record NZ$18.4 billion deficit in the year ending June 30, 2011, of which about half was costs and estimated insurance liabilities from the Christchurch quakes.

The shortfall is forecast to narrow to NZ$10.81 billion in the year through June 2012, and to NZ$4.44 billion a year later, today’s update showed.

Quake Toll

Christchurch, New Zealand’s second-biggest city, has been hit by a series of earthquakes since September last year, including a Feb. 22 temblor that killed 181 people and shut the central business district. The damage from the quake is estimated at NZ$20 billion, up from NZ$15 billion assumed in May, the Treasury said today.

Net government debt is expected to rise to 25.4 percent of GDP in the year ending June 30, 2012, up from 20 percent a year earlier. Debt is likely to rise to 29 percent of GDP at its peak in 2015.

Today’s pre-election fiscal update shows an economy going nowhere and a government with no plan to fix it, said David Cunliffe, finance spokesman for the main opposition Labour Party.

“National has failed to drive the economy forward,” Cunliffe said in a statement. “Things were bad when the budget was delivered and are still bad today.”

Borrowing

The government will borrow NZ$13.5 billion by selling bonds in the year ending June 30, 2012, unchanged from the program announced in May. Pre-funding from bond sales in the previous year have covered the additional costs associated with the earthquakes, the Debt Management Office said today.

English maintained the surplus forecast after the Treasury Department said gross domestic product will increase at a slower pace in coming years because of delays in rebuilding earthquake- devastated Christchurch and weaker global growth that may curb demand for exports.

New Zealand’s annual average economic growth is forecast to be 2.3 percent in the year ending March 31, the Treasury said today. That’s stronger than the 1.8 percent pace in May’s forecasts because the economy wasn’t as disrupted by the February earthquake as much as expected, it said.

Growth will improve to 3.4 percent in 2012-13. Still, that’s down from a 4 percent forecast in May’s budget reflecting weaker world growth, lower commodity prices and a delay in the start of the Canterbury rebuild into the second half of 2012, the Treasury said.

Modest growth, benign inflation and global market turmoil add to the case for central bank Governor Alan Bollard to keep the official cash rate at a record-low 2.5 percent at a review this week. All 18 economists in a Bloomberg News survey expect no change on Oct. 27 and just four expect an increase this year.

Consumer prices rose 0.4 percent in the third quarter, less than the 0.7 percent the central bank expected, Statistics New Zealand said today.

--Editors: Patrick Harrington, Brendan Murray

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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