KEY POINTS:
Finance Minister Michael Cullen's ninth budget was "extremely stimulatory" and will delay interest rate cuts and their magnitude, economists said today.
"Dr Cullen has thrown the kitchen sink and pot scrub at winning an election," said Westpac chief economist Brendan O'Donovan.
Tax cuts and new spending announced by Dr Cullen in the coming year amounted to 2.3 per cent of GDP.
Dr Cullen, who said his budget would not cause the Reserve Bank to raise rates, had done the bank no favours, he said.
The Reserve Bank had only $1.5 billion of tax cuts factored from next year but now they would come in from October 1 and the number rises to $3.8 billion in 2011/12, Mr O'Donovan said.
"It delays interest rate cuts substantially and reduces the magnitude of prospective cuts."
The Reserve Bank may have been contemplating an "insurance" cut due to dire retail spending and jobs at its next rate review on June 5, but that was now out of the question.
Economists also said Dr Cullen had outflanked the National Party because there would be no room for additional tax cuts or stimulus.
The New Zealand dollar jumped over one US cent to nearly US79 cents while two-year swap rates zoomed up 15 basis points in the wholesale money market.
Mr O'Donovan said the budget was a massive surprise. The surplus was forecast to shrink to virtually zero in 2011/12.
"They have delivered fiscal stimulus of more than could reasonably be expected," he said.
Dr Cullen announced a four-year programme of personal tax cuts worth $10.6 billion together with a modest increase in spending.
The super surpluses of his previous budgets had evaporated.
The OBEGAL operating balance (before gains and losses) for the June 2009 year is now forecast at $3.1 billion - half what was forecast in December. In the following year the $1 billion surplus is a quarter of the previous forecast.
Fresh economic stimulus will come from $4.8 billion of new operational spending together with capital spending of $1.2 billion in 2008/09 year.
Treasury has cut its forecast for economic growth in the year to March 2009 to 1.5 per cent from 2.1 per cent while the following year it has been trimmed to 2.3 per cent from 2.8 per cent despite the fiscal stimulus.
Goldman Sachs JBWere economist Shamubeel Eaqub said he did not believe the tax cuts would be sufficient to offset rekindle a sharply slowing economy.
He saw the cuts as providing a much-needed cushion to the bleak outlook of a sharply slowing economy.
"The tax cuts do not alter the economic outlook sufficiently and we maintain that interest rates will need to fall over the year ahead. We do not think the budget today will impede that process."
Treasury said there was an unusual degree of uncertainty in both the economic and tax outlook. Since its last formal review in December, the housing market had been a greater negative influence.
It now expects house prices to fall 2 per cent in the year to June instead of rising 6 per cent. They are now picked to fall 7 per cent in the year to March before gradually recovering later in 2009.
Agricultural production is forecast to fall 1 per cent from a year ago because of the summer drought.
As well, the world credit crisis and prospect of US recession had been more negative economic influences.
Low consumer confidence and the wealth effects of lower house and share prices would depress spending.
Treasury believes inflation will remain near the top of the Reserve Bank's 1-3 per cent for the three year forecast period.
Petrol and food prices, the effects of the credit crunch and the Government's Emissions Trading Scheme will all push prices up.
Wholesale interest rates will remain near 8.8 per cent until next year because of inflation pressures and only fall marginally.
The New Zealand dollar is expected to hold up this year but fall by 20 per cent from 2009 onwards, Treasury said.
The economic slowdown has occurred despite New Zealand's terms of trade being the best since 1974, thanks to booming dairy prices.
But the drought and high dollar would see export volumes fall 1 per cent in the coming year. They are then expected to be a key driver in an economic rebound in the year to March 2010.
High interest rates, the depressed housing market and near static immigration would keep the domestic economy subdued.
These factors would be partly offset by the tax cuts that will increase disposable spending by $1.5 billion in 2008/9, $2.3 billion in 2010 and $3.1 billion the next year, Treasury said.
- NZPA
