Treasury still forecasting a return to surplus by 2015 with help from lower Government financing costs.

A weaker economic outlook over the next four years has taken a bite of nearly $8 billion out of the Government's forecast tax revenues for that period.

Nevertheless the Treasury is still forecasting a return to surplus, though only just, on schedule by 2015.

The forecasts in yesterday's half-year economic and fiscal update are in line with the latest consensus forecasts, which means they are significantly weaker than in the Budget.

The growth track is lower by around 0.5 percentage points a year.


It reflects downwards revisions to expected growth among New Zealand's trading partners, and a kiwi dollar expected to remain around present levels until the first half of 2014, so that net exports subtract from growth for the next couple of years.

Unemployment has been revised higher; it is 7.3 per cent now and still expected to be 5.6 per cent by March 2016.

That will restrain wage growth and the Treasury expects households will continue the pattern of the past three years - in stark contrast to the improvidence of the 15 years before that - of living, just about, within their means.

Fiscal policy is seen as neutral this year - neither boosting nor subtracting from growth - but will be contractionary from next year on.

Finance Minister Bill English is unapologetic. With household debt running around 90 per cent of gross domestic product in a debt-averse world, it was essential for the Government to bend the curve of its debt down again, he said.

The forecasts have net Crown debt staying just under 30 per cent of GDP over the next five years before heading down..

Credit rating agency Moody's said the update did not affect its overall view of New Zealand's creditworthiness, with higher debt levels "easily manageable".

The only major positive revision has been to the stimulus from the rebuilding of Christchurch, which is now expected to cost around $30 billion.


The Treasury is still forecasting a return to a fiscal surplus, albeit just $66 million, by the 2014/15 financial year. History suggests a large margin of error surrounds any such estimate.

Of the $7.9 billion gap opened up by the downward revision to growth and tax revenue some will be made up by an increase in taxes on transport fuels announced yesterday, expected to bring in a cumulative $900 million by 2015/16.

Another $600 million comes from foregoing cuts to ACC levies proposed by the corporation's board.

A bigger contribution to filling in the fiscal hole comes from the flipside of weaker expected growth - lower inflation, which reduces inflation-indexed welfare payments, and lower interest rates, which reduce the Government's financing costs. Those effects are expected to cut expenses by $2.1 billion over the three years ahead.

A $1.2 billion saving over the forecast period, to June 2016, is attributed to timing changes related to earthquake expenses, and another $800 million to Government departments underspending their budgets.

Heartened by a recent rise in the tax take from the self-employed, including landlords, the Treasury has revised up its tax forecasts from that source by $1.3 billion, and has thrown in another $1 billion it just calls "other".


Thus is the four-year shortfall of $7.9 billion in tax revenue from a weaker economy clawed back and the track to surplus maintained. Unless the underlying economic forecasts prove wide of the mark.

The Treasury also offers alternative scenarios, the darker of which, predicated on weaker global growth, would shave an average 0.7 percentage points off New Zealand's growth rate over the three years ahead.

Considering the past six months, which were not marked by any major shocks, saw growth revised down by 0.5 percentage points a year, that is hardly implausible.

But it is enough to prevent a return to surplus.