NZ heading for bigger deficits; more room to cut rates further
Dec. 18 - New Zealand’s government finances are heading for wider budget deficits over the next few years on a weaker
track for economic growth that will give the central bank more room to cut rates, according to the Treasury’s latest
forecasts.
Inflation is forecast to be “significantly lower” than forecast in the pre-election briefing, the department said. “As
growth in the economy remains weak and the outlook for inflation declines, the Reserve Bank is expected to continue to
ease monetary policy.”
The government’s cash deficit may widen to NZ$6.63 billion in the year ending June 30, about NZ$700 million more than
was predicted in October. The gap widens to NZ$8.1 billion in 2010 and keeps widening through 2013, according to the
forecast track in the Treasury December Economic & Fiscal Update.
As the economy slows, fiscal stimulus will help underpin the economy, according to the assessment. Increased tax cuts
and other initiatives of John Key’s government may add 50-to-80 basis points to gross domestic product growth over the
next three years, according to economist Shamubeel Eaqub.
“This will be a welcome relief for an economy already in a year of recession and staring down the barrel of further
weakness,” he said. The government’s income tax cuts start in April and “should flow through to the economy relatively
quickly,” Eaqub said.
The economy probably shrank 0.4% in the third quarter, according to a Reuters survey and an NZIER survey of economists
yesterday predicted a decline in GDP in the year to March 31. The global slump has driven down prices of New Zealand’s
exports, such as dairy products, which have tumbled 43% from their peak in November 2007.
Tax cuts over the next two years will amount to 5% of GDP, or about NZ$9 billion, according to Finance Minister Bill
English. Adding further stimulus, English will oversee an accelerated spending program for infrastructure projects such
as irrigation, broadband and highways.
The next year’s budget for infrastructure development was increased to NZ$1.45 billion from NZ$900 million.
The government plans to sell more bonds in fiscal 2009 as tax revenue slows and spending increases. It raised the size
of the sales programme by NZ$500 million to NZ$4.5 billion, and boosted the target again for 2010 to NZ$7.5 billion.
(Businesswire)
ENDS