Finance Minister Bill English today prepared the ground for a tough budget next month in a speech painting a bleak picture of the country's economy which could see promised tax cuts dropped.
Speaking at a pre-budget business leaders lunch in Auckland, Mr English said the budget was being readied against a backdrop of global and domestic economic conditions and trade-offs would be needed.
"Just about every unlikely event has occurred and every worst case scenario has become reality," he said.
English said the Government was committed to retaining social entitlements and improving public services but it would not let debt get out of control.
Entitlements to superannuation, working for families, interest free student loans and social welfare benefits would be retained.
"That means we will be focusing quite strongly on reprioritising other government spending, particularly government spending for public services," he later told reporters.
There would be no room for significant fiscal stimulus in the budget and the rate of increased spending would be lower than in the past.
English said the Government would demand high quality for its spending and personal income tax cuts planned for 2010 and 2011 would only go ahead only if affordable.
"We'll announce a decision about future tax cuts in the budget."
He told reporters the Government would like to proceed with the cuts "if they are affordable and we will have to balance up the benefits of the tax cuts with these preliminary forecasts that show debt reaching some very high levels".
New Zealand was expected to permanently lose about $50 billion of output over the three years to 2012 because of the recession.
While other countries faced large contractions in their economies New Zealand had gone into recession sooner and was now in its sixth quarter of recession.
Tax revenue and receipts for the eight months to February were $1.8 billion lower than forecast in the Pre-Election Update.
Core crown expenditure this year to June 30 was expected to be $63.5 billion - up $21.6 billion or 51 per cent in the past five years while the economy was estimated to grow by 23 per cent in that time and tax revenue by just 24 per cent.
"The point I'm making here is that government spending growth cannot continue at this rate, particularly with revenue falling so significantly in the current environment."
English said growing expenditure and dropping revenue would lead to significant deficits.
With no policy change, Crown gross debt would hit 45 per cent of GDP by 2013 - up from the main December forecast of 33 per cent. And it would exceed 70 per cent by 2023 - up from 57 per cent in the main December forecast. Crown debt would have jumped by more than $100 billion to around $135 billion by 2023; "or $30,000 for every man, woman and child in New Zealand.
"Those preliminary forecasts are unacceptable to us. We need to get that debt down so the budget will outline a plan for reducing those very high potential debt levels."
The budget would continue steps to address the downturn; put in place longer-term initiatives to lift productivity, improve competitiveness and economic performance and take steps to consolidate the Government's fiscal position and make policy changes to ensure that growth in government debt was minimised and brought under control.
English told the lunch he was personally optimistic about New Zealand's prospects.
"...I believe that with the right plan, New Zealand can come out of this recession in a stronger position to maximise future growth."
- NZPA
Read the full pre-Budget speech here
