Prime Minister tips early surplus

The Budget will stress that under Key's and Bill English's stewardship, New Zealand has come through the global financial crisis with little damage to the local economy. Photo / Mark Mitchell

Prime Minister John Key says it is possible the Government could get close to a surplus in the coming financial year - one year earlier than officially predicted in yesterday's Budget.

He told the Trans-Tasman Business Circle at Auckland's Vector Arena today that the forecast deficit of only $2.03 billion in the coming year was less than 1 per cent of gross domestic product.

"It's not impossible that we could have got pretty close to being back in surplus next year," he said.

"Last year we expected a deficit of $7.5 billion. It came in at $6.2 billion."

He said tax revenues were "broadly back to where they were in 2007" and there was "an inherent strength in the economy" compared with other countries with much bigger deficits.

"If there is a simple message, it is that we have to hold the line," he said.

But he told the Auckland audience that double-digit inflation in Auckland house prices was "really bad".

"It's not sustainable. It will eventually drive the banks to continue to increase their loan-to-value ratios because more consumers will want to get on the train," he said.

"Secondly, if there is anything that really determined New Zealand's fate in the global financial crisis, it was that the banking sector in New Zealand - which is the Australian banks - was very healthy.

"The thing that killed the US economy was the destruction of their banking system, particularly the sub-prime mortgages, so if you get a massive bubble in your economy it's bad for the economy long-term."

He said Reserve Bank Governor Graeme Wheeler did not want to raise interest rates because of Auckland house prices, because it would drive up the exchange rate at a time when three-quarters of world output was being produced by countries with interest rates at or below 1 per cent.

Instead, he expected Mr Wheeler to use new tools such as restricting the banks' loan to value ratios, possibly with exceptions for first-home buyers.

Last week the Reserve Bank raised the risk weights applied to housing loans granted by the four largest banks that have a loan-to-value ratio above 80 per cent, effectively raising the capital held for housing by an average of around 12 per cent with effect from September 30.

"What the Governor is very conscious of is that there are a lot of first-home buyers who do want to borrow a bit more than that," Mr Key said.

"So it's entirely possible that he will have speed limits and go to the banks and say you can have a carve-out for first-home buyers."