Budget 2006: Treasury expects quick recovery after slump

The economy is heading for a deeper slowdown than Treasury previously expected, but is forecast to bounce back quickly after a period of weak growth.

The Budget revealed that Treasury now expects a sharper downturn than it did six months ago - with gross domestic product growth bottoming at 1 per cent in the year to March 2007.

Only six months ago Treasury forecast that 1.7 per cent growth would represent the bottom of the economic cycle.

Higher interest rates and rising petrol prices are among the reasons for its less optimistic short-term view, because they have dented people's spending.

As the economy slows, some workers can expect to lose their jobs - Treasury forecasts unemployment to rise to 4.7 per cent in 2007 from 3.8 per cent in 2006.

But while the short-term outlook is a bit gloomier than it was six months ago, Treasury is picking a quick recovery.

Boosted by a lift in exports from the agricultural sector and a fall in the value of the dollar, economic growth is forecast to bounce up sharply to 3.3 per cent in the year to March 2008.

It is then seen by Treasury as remaining above 3 per cent for the rest of the forecast period through to 2010.

Unemployment is expected to fall back slightly as the economy strengthens again.

Finance Minister Michael Cullen yesterday said that Treasury's new forecasts represented a soft landing for the economy.

But lower growth, smaller profits and a "small rise" in unemployment meant that the current year was expected to be the last one with a cash surplus "for some time", Dr Cullen said.

Dr Cullen expects to continue to run operating surpluses in the current financial year and the following one, but reiterated that during that time the Government's accounts would move into a cash deficit position.

However, the Budget documents cast some doubt on that statement because there is a sizeable difference between Treasury's and Inland Revenue's views when it comes to predicting the future tax take.

Inland Revenue is forecasting $1.5 billion more than Treasury in tax revenue in the 2007-08 financial year, and almost $2 billion more the following year. Dr Cullen is obliged to use Treasury's views, but if Inland Revenue proves to be correct then the Government will have more in its coffers than it expects.