Cullen on BPS, latest economic and fiscal forecasts

“After growing 25 per cent since 1999 against an OECD average of only 16 per cent, the New Zealand economy may be about to enter heavier waters,” Finance Minister Michael Cullen said today.

Dr Cullen was commenting on the release of the Budget Policy Statement [BPS] and the 2005 Half Year Economic and Fiscal Update.

The Treasury now believes that growth will hold up stronger for longer than in its pre-election forecasts issued in August but that the slowdown, now projected for the 2007 and 2008 March years, will be deeper when it does occur.

Its growth forecasts of 1.7 per cent and 2.5 per cent respectively over those two years would, if realised, represent the weakest two consecutive annual results since 1998 and 1999 following the Asian crisis and the drought. Growth is expected to rebound to 3.8 per cent in 2009.

“Most of the factors driving the new forecasts have been manifest for some time: lower net migration, a high exchange rate, rising interest rates and weak agricultural production. But the impact of these has been masked by high household consumption, some of which has been financed by borrowing.

“This demand is expected to slow, especially in the housing market, as higher interest rates begin to bite while exporters continue to struggle against the effects of a high dollar,” Dr Cullen said.

He said the pressures on inflation and the current account deficit were expected to begin winding back in 2007.

“The government, as the BPS affirms, will assist with this process by maintaining Crown debt at prudent levels across the forecast horizon and continuing to run surpluses sufficient to meet contributions to the New Zealand Superannuation Fund.

“There has been a slight deterioration in the cash position since the August forecasts with a small $492 million surplus projected for the current year followed by deficits over the ensuing four years averaging almost $2.2 billion.

“But the biggest difference in the two sets of forecasts is the reduction in the OBERAC in the current year, from $7.3 billion to $5.9 billion. This is due mainly to the impact of the interest free policy and the shift to a fair value accounting approach on the Crown’s student loans portfolio.

“The OBERAC forecast next year is also lower reflecting the increase, signalled in August, of the operating allowance for Budget 2006 from $1.9 billion to $2.4 billion to accommodate the extensions to the Working for Families package announced at that time. These will take effect at 1 April and will materially improve the lives of 160,000 working families. “The allocations for the 2007 and 2008 budgets have been held at $1.9 billion,” Dr Cullen said.

“The strong economic performance of the last five years has delivered higher real living standards, the lowest unemployment rate in the OECD, reductions in crime and poverty and increased funding for capital investment and for health, education and other public services.

“Budget 2006 and future budgets will build on this platform and will seek to lift New Zealand’s economic capacity through initiatives to lift savings, lift labour productivity, lift skills, lift innovation, lift exports and modernise the country’s infrastructural assets,” Dr Cullen said.

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