Brian Fallow

The Economics Editor of the NZ Herald

Treasury predictions much rosier

Govt contributions to Super fund and return to surplus now expected to happen a year earlier than forecast.

The terms of trade is expected to stay close to historic highs, supported by rising demand for commodity exports.
The terms of trade is expected to stay close to historic highs, supported by rising demand for commodity exports.

The Government expects to resume contributions to the New Zealand Superannuation Fund in 2019/20, a year earlier than projected in last May's Budget, reflecting a rosier outlook for the economy and Crown finances.

The Treasury's half-year economic and fiscal update, released yesterday, has revised upwards the track for economic growth by a cumulative 1.2 percentage points over the current and next three March years, compared with its view back in May.

Half of the increase is in the 2014/15 year when growth is now expected to hit 3.6 per cent compared with 3 per cent previously.

The resulting boost to tax revenue, combined with ongoing restraint on the spending side, means the Treasury has cut the amount it expects to borrow on the bond market over the four years by $4.2 billion to $16 billion.

It expects to return to a cash surplus in the 2016/17 fiscal year, a year earlier than projected on Budget day, and to resume contributions to the NZ Super Fund a year earlier as well - though still 10 years after they were suspended.

Net government debt is projected to peak in 2015/16 at $65 billion or 26.5 per cent of GDP rather than $70 billion a year later.

But while stronger economic growth in the 2014/15 year is projected to increase nominal gross domestic product (a proxy for the tax base) by $1.4 billion more than expected at Budget time, there has been almost no change in the forecast operating balance excluding gains and losses (Obegal) that year. It is still forecast to see the long-heralded return to Obegal surplus but at just $86 million it is essentially unchanged from the Budget's $75 million.

The boost from a higher tax take and lower benefit expenses has been offset by upward revisions to the forgone profits from state-owned enterprises and by lower interest income for the Super Fund and ACC.

"Since these are non-cash items, there was still scope to reduce the bond programme between now and 2014/15," Westpac chief economist Dominick Stephens said. "The size of the reduction in the bond programme came as a surprise to financial markets, so bond rates fell a couple of basis points. The New Zealand dollar rose around a 10th of a cent."

The Treasury's economic forecasts have pressures on the demand side of the economy building in the near term: as well as the Canterbury rebuild and need to address a housing shortage in Auckland, the terms of trade is expected to stay close to historic highs, supported by rising demand for commodity exports.

It has revised up growth in household consumption in the current year. But while it assumes households are "broadly comfortable" with how much they have reduced debt in recent years, it assumes they will remain cautious in their spending and increase consumption in line with incomes rather than revert to the debt-fuelled boom of the last decade.

An extra net inflow of about 26,000 migrants (compared with Budget estimates) will boost both demand and supply sides of the economy but demand first, particularly in the Auckland housing market.

Offsetting those upward pressures on demand will be fiscal contraction, rising interest rates and a high dollar.

Employment is forecast to grow 2 per cent in this March year and 2.6 per cent next year, bringing real wage growth of about 1 per cent a year.

Unemployment is forecast to slowly decline from 6.2 per cent now to 4.7 per cent by early 2018. But that would still be higher than the 4.5 per cent rate assumed to be problematic from the standpoint of inflation.

With near-term economic growth expected to exceed the economy's "speed limit" - taken to be around 2.5 per cent - interest rates are expected to start rising from early next year.

- NZ Herald

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