Deficit figures point to budget pressures, Key says

The Christchurch earthquake has partly contributed to the $1.7 billion higher-than-forecast deficit, says Prime Minister John Key. Photo / Thinkstock

A $1.7 billion higher-than-forecast deficit points to the fiscal challenges the Government faces in its May budget, Prime Minister John Key says.

Treasury today released the Government accounts for the eight months to February and Finance Minister Bill English said the deficit was partly due to the Christchurch earthquake.

"The accounts do not include the full costs of the earthquake, but they do include an estimate of the Earthquake Commission's (EQC) net cost of $1.5 billion," Mr English said.

"This is the main reason for the operating deficit before gains and losses coming in $1.7 billion higher than forecast at $9.2 billion for the eight months."

Mr Key said the Cabinet spent most of its meeting today working on the budget.

"The Crown accounts for the eight months to February contain some general comments on the earthquake and include the $1.5b initial EQC cost for the second earthquake," he told reporters.

"All of this points to the fiscal challenges we face at budget 2011."

The accounts also included a $331 million increase in the Government's expected loss from the Retail Deposit Guarantee Scheme, which covered eligible depositors in failed financial institutions.

"Most of this is attributable to a reduction in expected related party loan recoveries from the receivership of South Canterbury Finance," Mr English said.

"The receiver has provided updated information on South Canterbury's lending business not available previously.

"In addition, the expected effect of the latest Canterbury earthquake has been factored into likely recoveries."

The Government expected a net loss from the Retail Deposit Guarantee Scheme of around $1.2 billion, compared with earlier estimates of around $900 million, he said.

The significant extra one-off costs would add to what was already shaping as a large deficit in the current financial year.

"The deficit forecasts will be updated in the budget on May 19. They will reinforce the need for the Government to carefully consider its spending priorities and set a credible path back to budget surplus.

"Only then can we begin repaying our debt and building a buffer against the next economic shock."

The Government would continue to focus on reducing overseas debt and improving growth and savings.

"On a positive note, the operating balance after gains and losses was $2.5 billion in the eight months to February - about $3.5 billion better than forecast. This reflected strong investment gains by the New Zealand Superannuation Fund and ACC, along with actuarial gains on ACC and Government Superannuation Fund liabilities."

Labour's finance spokesman, David Cunliffe, said the Government was using the earthquake to justify "savage cuts" to public spending in the budget.

"With the Earthquake Commission estimating the net cost of the quake at $1.5b, National believes it has found its excuse to further its own ideological priorities and produce a zero budget that dramatically slashes services for low to middle-income Kiwis," he said.

"The economy was significantly weaker than expected just two months ago - before the earthquake - and two-thirds of the expected $15b loss of production over the next four years is due to the Government's mismanagement of the economy."

- NZPA