Finance Minister Bill English indicated it would take another global meltdown or catastrophe to put the Government off its stride to return the books to surplus in the 2014-15 financial year.

But he also warned of much more belt-tightening ahead for the public sector over the next few years, with no increases except small ones in education and health.

Mr English repeatedly said yesterday at a media briefing on Treasury's updated forecasts that the Government was committed to a return to surplus by 2014-15 - despite lower growth and forecasts than in the May Budget.

"Of course, if there is some kind of meltdown, then you would expect us to handle it in a similar way to 2008-09 - and that is to protect the vulnerable, maintain public services but stick to a longer-term view about lifting our economic prospects.


He put the risk of a meltdown at about 1 in 20, or 1 in 30, and referred to discussions by the European leaders on the Greek debt crisis.

"There is some risk of catastrophe: Lehmans showed us that," Mr English said. "The Europeans might completely go off their nuts and do something really stupid, and we have a meltdown next week. I think that is a relatively low risk. There is more probability that they will muddle through, that global growth will be lowered but not really low, and that's a good enough environment for a resilient economy driven by sensible policies to do reasonably well."

National has made a feature of the return to surplus "sooner" on its current billboards - though Labour reiterated yesterday that it would also return to surplus in 2014-15.

Labour leader Phil Goff said nothing had been done to improve the books and it had strengthened Labour's resolve "not to take the soft decisions for today ... but rather to take the tough decisions, the necessary decisions for tomorrow".

GDP growth forecasts in yesterday's update are relatively unchanged from the May Budget, at an average 2.9 per cent over the next four years. Mr English said the forecast of 170,000 new jobs over four years was on target. Unemployment was still forecast to drop below 5 per cent in 2013.

But Treasury also provided a "downside scenario" of a sharper slow-down in trading-partner growth, which could lead nominal GDP to be $35 billion lower over the five years to 2016.

It also calculated there was a one-in-five chance that the New Zealand economy could be even worse off than the downside scenario.

Treasury said growth from the rebuild after the Canterbury earthquake would not start in earnest until the second half of next year, not the first half as previously forecast.


It also revised the overall cost from $15 billion to $20 billion, taking into account private insurance costs and EQC costs.

The operating balance, excluding gains and losses (Obegal), is forecast to fall to a $10.8 billion deficit in the year ended June 2012, down from the $18.4 billion deficit in the year just ended, half of which was down to borrowing for the Canterbury rebuild. The deficit then drops to $4.4 billion, then $943 million before heading just into the black in 2014-15 to the tune of $1.45 billion, and $3.07 billion in 2015-16.

Mr English said the credit-rating downgrades last month had had no effect on mortgage rates nor on the cost of Government borrowing.