KEY POINTS:
Monday's pre-election opening of the Government books is expected to reveal forecasts more like the grim alternative scenario sketched in the 2008 Budget than its relatively sunny main forecast.
The "relatively extreme" scenario of severe and prolonged turmoil in global financial markets, which the Treasury outlined as a
"low probability" five months ago, now looks realistic if not optimistic.
It would mean higher funding costs for banks and higher borrowing costs for households and businesses lasting until 2011, weak growth among the country's trading partners and an upsurge in caution which made households less willing to spend and firms reluctant to invest.
Under this scenario real economic growth would be less than 1 per cent in the current March year and next year as well.
The cumulative reduction in nominal GDP, compared with what the Treasury was forecasting in May, would be a hefty $33 billion by 2012, meaning about $10 billion less tax revenue.
It would also mean a string of fiscal deficits, after 14 years of surpluses, and a rise in the gross debt to GDP ratio from 18 per cent now to 22 per cent by 2012.
And that would be without factoring in any vote-chasing promises from whichever party leads the next Government - beyond the normal allowance for new initiatives of $1.8 billion a year.
ANZ National Bank chief economist Cameron Bagrie said the next Government would face a challenge familiar to businesses, that revenue can fall quickly but costs tend to be sticky.
"With high near-term inflation, Government spending is set to rise even without any new spending policies."
This is because welfare spending increases as the number of people on benefits rises - albeit from a very low base this time - and because benefits are indexed to inflation.
"Ongoing wage demands from the public sector and the popularity of KiwiSaver will also keep upward pressure on the spending line," Bagrie said.
By a happy chance the first tranche of tax cuts which started this week were coming at a time when the economy needed it, he said.
With households spending less and saving more or reducing debt, we would see a switch between public and private savings, with the former falling and the latter rising.
"This is part and parcel of the rebalancing the economy needs to go through," he said.
"If the adjustment were to be entirely borne by the private sector it would no doubt be much faster but the impact on the real economy would be much more severe."
Bank of New Zealand economist Craig Ebert said Government accounts the world over had a habit of deteriorating during slowdown faster than people imagined - the reverse of larger-than-expected surpluses on the way up.
"And it's a structural fiscal deficit we are envisaging - essentially reflecting the inflationary froth coming out of the economy and the Crown accounts - rather than a cyclical situation we can expect to climb out of in short order as the economy improves," Ebert said.
Bagrie forecasts a string of fiscal deficits over the next four years but not getting much deeper than 1 per cent of GDP, in the 2009/10 year - modest by the standards of New Zealand in the 1980s and many OECD countries today.
"At the moment we are viewing the deficits as cyclical and temporary." But in reality it was very hard to tell the difference, Bagrie said.
"Given how quickly the fiscal position is going into the red it may seem that the surpluses of the past few years might have been purely cyclical after all."
PREFU
* Monday's pre-election fiscal and economic update will:
* Slash forecasts of economic growth and revenue compared with the Budget.
* Foreshadow a string of operating deficits - not seen since 1994 - and a rising track for Government debt.
