'The rainy day has now arrived'

By TRACY WATKINS - The Dominion Post | Monday, 06 October 2008

The risks of a more severe economic downturn have increased, Treasury has warned after revealing rising levels of government debt and cash deficits over the next decade.

In issuing its pre-election fiscal update, Treasury said its forecasts were finalised in late August, when it made some allowance for the likelihood of weaker world growth, but before the recent turmoil in world financial markets.

And while it still expected the New Zealand economy to evolve broadly in line with earlier forecasts "considerable uncertainty exists around this outlook, with the risks increasingly moving to the downside."

Speaking at the release of the Treasury update, Finance Minister Michael Cullen said the scale of international turmoil was unprecedented.

"What we thought we knew even five months ago has been overtaken by events," Dr Cullen said.

"The rainy day has now arrived."

Key figures from the fiscal update include:

* Gross government debt to rise from 17.4 per cent of GDP to 24.3 per cent by 2013 against the Government's target of 20 per cent of GDP on average.

* Growth expected to be only 0.1 per cent by March 2009 before lifting to 1.8 per cent and then 3.3 per cent in the following two years.

* The budget deficit (OBEGAL) forecast to be $64 million next year rising to $1.7 billion by 2010 and staying in deficit for 10 years.

* A cash surplus of $2 billion in the year to June falling to a projected cash deficit of $5.9 billion in 2008/2009 and further deficits over the next four years rising to $7.3 billion by 2012. In the May budget cash deficits were forced to average $3.5 billion.

* Dollar to decline in value by 22.7 percent by 2013.

* 90-day interest rates falling from 8.8 per cent to 6.3 per cent by 2013

* $496 million is all that is left in next year's budget for new spending promises

* Unemployment tipped to rise above 5 per cent by 2010

* Inflation forecast to rise to 4.5 per cent by March 2009 before falling back to just under 2.5 per cent.

* Tax revenue for the next three years to be lower on average by around $900 million.

* The government reported a surplus for the year to June 2008 (OBEGAL) of $5.6 billion.

Treasury said the outlook was weaker to that forecast in the May budget for a number of reasons.

These included that the domestic slow-down had been sharper than expected, with declines in consumption and a more rapid fall in residential investment.

Households and businesses had come under increasing cost pressures, meanwhile, including higher electricity, interest rate, fuel and food prices, which had dampened private consumption and business profitability.

"It will take time for these pressures to dissipate, though some relief in terms of oil prices and interest rates has emerged since the finalisation of our economic forecasts," Treasury said

But the housing market had also weakened more quickly than expected and was expected to remain depressed over the next year as a result of high effective interest rates, low net migration falls and falling consumer confidence, which would affect private consumption and residential investment.

Meanwhile, international financial turmoil had deepened and was having an adverse impact on global economic growth.

"New Zealand is expected to feel the effects of the financial crisis principally through the tighter availability and increased costs of credit, but also through a fall in business and consumer confidence, falling asset values and lower demand and prices for our exports."

The main reason for the weaker fiscal position compared to budget forecasts was the weaker economic outlook, leading to lower tax revenue and higher spending. The largest single change in spending was an increase in the expected costs of benefits - $500 million more than previously forecast. That reflected both an increase in the number of beneficiaries and the impact of higher inflation on the costs of indexing benefits.

Some government policies were also costing more than forecast - including $200 million more a year on early childhood education, following higher than expected take-up of the 20 hours free policy.

KiwiSaver costs were also $280 million above forecasts.