Prime Minister John Key has acknowledged the European debt crisis may prove worse than Treasury's Budget 2012 forecasts and the government would then choose to borrow more and delay its return to surplus from 2014/15 if the crisis worsened considerably.
Treasury says its economic forecasts in Budget 2012 are still their best judgement on where the New Zealand and world economies are headed, although the risk of a worsening situation in Europe has increased since the forecasts were finalised, Key told a post cabinet news conference in Wellington.
The economic forecasts for the May 24 Budget would have been finalised near the end of April, before a failed Greek election on May 6, and an anti-austerity vote in France's Presidential election.
Spain's borrowing costs have risen to unsustainable levels during May, and local data here has come in on the sluggish side. Unemployment unexpectedly jumped to 6.7 per cent in early May, and the prices of dairy commodities sold at Fonterra's on-line auctions have hit a three-year low.
Speaking at his post-Cabinet press conference on Monday afternoon, Key said it was still too early to tell whether the latest concerns about Europe were just a temporary negative blip like those Treasury was incorporating into its forecasts. This happened at the end of 2011, before markets recovered again in the new year.
The forecasts already factored in a sharp recession across Europe.
However the risk of something worse happening in Europe had been increased by events during May, he said.
Key said the government would consider pushing its 2014/15 surplus track back if the European situation deteriorated considerably.
Asked whether the government would look to cut spending further if the crisis intensified, or whether the government would be prepared to borrow more if it had to extend the surplus track, Key said the government would likely borrow to bridge deterioration in tax revenue, rather than cutting schemes like Working for Families.
He said the Budget's main forecasts would show a small surplus in 2014/15. The size of the deficit in 2013/14 could be a positive surprise to Budget watchers, he said.