Budget surplus drops $1.7 billion

The Government has slashed its forecast Budget surplus for this year as it writes $1.5 billion off the value of the student loans in its books.

The Treasury is forecasting an operating surplus of $5.6 billion for the year to next June, down from the $7.3 billion it estimated before the election.

In the half-year economic and fiscal update released yesterday it also lowered its forecast surpluses for 2006-07 and the year after to reflect a sharper slowdown in the economy.

"The slowdown is now clearly arriving," Finance Minister Michael Cullen said. But a recession - two successive quarters when the economy shrinks - was unlikely, he said.

The Treasury is forecasting a soft landing in which economic growth bottoms out at 1.7 per cent in the year to March 2007. But it acknowledges a risk of a 0.7 per cent trough if households get more worried about debt than it expects them to and cut back their spending accordingly.

The $1.5 billion downward revaluation to $5.5 billion of the student loan portfolio, which is counted as an asset in the Crown's books, reflects a change in accounting rules as well as the adoption of the interest-free policy.

In the past, because student debtors have tended to repay only seven of every eight dollars they borrow, the Government has valued every dollar it advances at 87.2c in its books.

But that does not allow for the fact that for the past five years the loans have not been earning interest while students are studying and under the new policy announced before the election they will continue to be interest-free as long as the borrower remains in the country.

Under new accounting rules, the loans will be recorded at their fair value, estimated at 66c in the dollar.

The total impact of this revaluation of existing loans is $1.5 billion, of which $1 billion is the result of the promised shift to a no-interest policy.

That $1 billion could be seen as the up-front cost of the policy, expressed as a lump sum.

Dr Cullen stressed that the ongoing operating cost of the scheme, the interest forgone, is estimated to be $218 million next year, rising to $269 million in 2009-10.

"This is in line with, although a little lower than, the Labour Party's costings and significantly lower than the Treasury scenario released during the election campaign."

Dr Cullen said the next Budget, his sixth, would be boring and predictable - "no fireworks and certainly no deep, dark secrets".

Of the $2.4 billion available for new operating spending, half has been committed. Health, Working for Families and the student loans scheme are the big-ticket items.

In contrast to this year and last, when money has been pouring into the Government's coffers faster than it has been going out, the Treasury is forecasting cash deficits for the next four years. In other words it will be adding to spending power in the economy.

"But there is no room for further substantial fiscal easing," Dr Cullen said. "If you assume about $750 million more for health, it will be a pretty tight budget."

NZ ECONOMY:
THE OUTLOOK

* Growth Falls to 1.7 per cent in 2007, edges up to 2.5 per cent in 2008.

* Surplus Forecast $7.29 billion for the year to next June has been downgraded to $5.57 billion.

* 2006 Budget Dr Cullen: "There will be no fireworks and certainly no deep, dark secrets."