GDP growth fuels Treasury confidence of surplus

Finance Minister Bill English. Photo / Mark Mitchell

The Treasury is still forecasting a return to fiscal surplus in the 2014/15 year, despite revising down its expectations for economic growth that year and the year before.

It can do this because the pre-election economic and fiscal update, released yesterday, has a stronger starting point than the May Budget had.

Gross domestic product growth in the year to March 2011 came in at 1.6 per cent, when the Budget had forecast 1 per cent, and it is now looking for growth of 2.3 per cent in the year we are halfway through, up from 1.8 per cent in the Budget forecasts.

The latest forecasts assume continuing caution on the part of households; indeed, they have shaved 0.4 and 0.5 per cent off forecasts of private consumption - which makes up 60 per cent of demand in the economy - over the next two years, respectively.

The Treasury has also had to take a cumulative 2 percentage points off forecasts of growth among New Zealand's 16 largest trading partners over the next four years, even assuming Europe's leaders manage to avert another financial panic, credit crunch and global recession.

Offsetting that, however, is a bigger expected boost to activity from the rebuilding of Christchurch, reflecting the fact that the estimate of the damage done by the earthquakes has been revised up from $15 billion to $20 billion.

Finance Minister Bill English said the net effect was a flatter growth trajectory - averaging just under 3 per cent a year over the next four years - but off a higher base,

The silver lining of a weaker global growth outlook is interest rates that are lower for longer, benefiting businesses and people with mortgages.

The credit rating downgrades have increased longer-term bond yields by only around 15 basis points, the Treasury estimates.

"Yields on government bonds have risen slightly," English said, "but so have other people's."

The Government's interest bill is expected to grow from $3.7 billion or 6 per cent of revenue in the current fiscal year to $4.3 billion or 5.4 per cent of revenue in four years' time.

The operating deficit, excluding gains and losses, for the current year has been revised up to $10.8 billion from $9.7 billion on Budget day, but that is largely explained by delays in some quake-related spending.

The deficit is forecast to shrink to $4.4 billion or 2 per cent of GDP next year and just under $1 billion the following year, before the ink turns black in 2014/15.

Achieving a surplus on that timetable would depend on two things, ANZ's head of market economics Khoon Goh said. One was whether GDP growth could average 2.9 per cent over the next five years as the Treasury forecast. The other was whether restraint in Government spending could be sustained. "There is little room for fiscal slippage."