Budget 2011: Back in the black by 2014?

Finance Minister Bill English with a copy of the Budget he will present tomorrow. Photo / Mark Mitchell

New Zealand's government accounts could be back in surplus by March 2014, a year earlier than forecast, says the ANZ Bank in its outlook for tomorrow's unusually austere election year Budget.

ANZ's is one of the most optimistic among bank forecasts for the fiscal outlook, but consistent with expectations from a wide range of economists that tomorrow's historically high Budget deficit, likely to clock in at more than 8 per cent of GDP or around $16 billion, is a temporary one-off.

By next year, forecasters are expecting the deficit to drop back to around half that level, with ANZ suggesting the Treasury will forecast a return to a break-even surplus by March 2014.

"A tight fiscal rein, savings from KiwiSaver and some help from booming commodity prices will see a return to surplus, quite possibly by 2013/14, which is much earlier than most expect," the ANZ says in its Budget preview.

"It would be a remarkable turnaround if this could be achieved, and will certainly take pressure off a prospective credit rating downgrade."

Meanwhile, Westpac Institutional Bank's commentary is in tune with comments earlier this week from Prime Minister John Key, who said people would be surprised by the extent of savings available from government spending from just a few initiatives.

The Budget is expected to show no net increase in new spending, meaning a cut in inflation-adjusted terms.

"This is one reason why we assume that the freeze will only be applied to the next year," says Westpac.

"Even a one-off pause in the rate of growth help to reduce deficit projections in later years as well."

Well-signalled cuts to government contributions to KiwiSaver will be made up by increased employer and worker contributions, and will make a useful contribution to the country's biggest ongoing threat - its very high levels of private foreign debt - by accelerating local savings levels.

On changes expected for the Working for Families package, Westpac suggests a combination of reduced inflation adjustments "which might be done through gradually lower the income level at which abatements set in."

A freeze on the abatement level had gone almost unnoticed in last year's Budget and had produced "a major cost saving," says Westpac.

Again, its speculation is consistent with Key's comments this week that while WFF entitlements would be reined in, recipients would still continue to receive more cash in the hand in future years, since some degree of inflation indexation will continue.

ANZ also expects that there will be cuts in areas once regarded as "sacred cows", but which New Zealanders will now more readily accept as capable of sacrifice because of the known high costs of rebuilding Christchurch after the September and February earthquakes.

As a result, tomorrow's election year Budget will produce a zero increase in spending, which is "not only remarkable, but unheard of" in election, says the ANZ. "In the previous eight Budgets, new operating spending averaged around $2.6 billion a year."

As a result, any spending cuts this year would still leave total government spending relatively high by historic standards.

While the 2012 Budget deficit may grab the media headlines, ANZ says its biggest concern is the forecast size of the balance of payments deficit, which measures how much wealth New Zealand is absorbing from the rest of the world to make up the shortfall in its own efforts.

"From 2013, current account deficits below 4 per cent of gross domestic product are hard to achieve, given that rebuilding Christchurch will increase import penetration," ANZ says. "Such figures will keep rating agencies attuned to the external as opposed to local situation."

With public debt to GDP likely only to nudge above 30 per cent of GDP, New Zealand's government accounts were "world-class", given the prolonged recession, finance company collapses and the costs of the Christchurch earthquake. But high private foreign debt remains "problematic".

Westpac is particularly bullish on the outlook for economic growth, which it expects to hit 7 per cent in 2012 because of the impetus from Christchurch reconstruction, and this can be expected to improve tax revenues.