New Zealand Government signals reversal of fortune

The Government’s robust $372 million forecast surplus from Budget 2014 will turn into a $572 million deficit, according to the 2015 Half-Yearly Economic and Fiscal Update and the Budget Policy Statement. Imports are cheaper and good export prices are not being achieved which has led to a reduction in the Government’s tax take.

PwC Economics Director, Chris Money says, “In the current year, it doesn’t matter that we missed the surplus. The market is more interested in the direction of travel than the absolute number, and that direction of travel is still good. We’re more interested in the forecast surplus for the years beyond the current year.”

The pre-election forecast in August took half a billion a year out of those surpluses, effectively cutting $1.5 billion out of the future budget provisions. Those revisions called into question the prospect of the Government’s future spending intentions - hints at tax cuts towards the end of the current parliamentary term.

The current update keeps the average operating balance at about the same level as the pre-election update over a comparable forecast period. However, the billion dollar increase in the operation balance in 2018/19 may give the Government some comfort around its spending intentions towards the end of the parliamentary term.

Treasury have also kept their economic growth forecasts unchanged at 3.3% which reflects a stronger domestic economy driven by construction and consumption, offset by lower prices for commodities such as dairy.

“Bill English is, however, bullish about turning that forecast around and reaching a surplus by 30 June 2015, describing the deficit as “small”. The 2015/16 surplus has also been revised down to $565 million and the operating balance then recovers to be broadly in line with Budget and Pre-EFU forecasts in future years, rising to $4.1 billion in 2018/19.

“All in all, despite weakening dairy prices, the domestic economy keeps growth largely in line with the Budget 2014 predictions,” concludes Mr Money.

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