English set on hitting surplus

Finance minister Bill English

Strong economy and constrained govt spending key

Finance Minister Bill English still believes he will be able to get the Government's books back into the black this year, but says it will be a challenge.

The Treasury's pre-election economic and fiscal update (Prefu) three months ago forecast a wafer-thin surplus of $300 million for the 2014/15 year.

But at 0.4 per cent of government revenue that is well within the margin of error for a figure that is the difference between two very large numbers, revenue and expenditure, with a lot of moving parts.

Since then export prices for dairy products have continued to fall, reducing spending power in the economy by billions of dollars compared with last season. And inflation in NZ, as in most of the rest of world, has been running at very low rates.

In a speech to an ASB business breakfast in Auckland yesterday English said the combination of lower commodity prices and low inflation meant the nominal or dollar value of New Zealand's economic output would not grow as fast as previously expected.

"This will affect farm and company incomes and we expect this to flow into the Government's books through lower revenue," he said.

"On the other hand ... low global inflation, a strong dollar and more jobs mean we are not seeing the cost of living increases that would usually go with the kind of real economic growth we are experiencing right now. This means New Zealanders have more spending power as, on average, their incomes are rising a bit faster than the cost of living."

Low inflation also meant less pressure on the Reserve Bank to raise interest rates.

"We believe the strength of the economy and constrained government spending can deliver a surplus when the final accounts are published late next year," English said.

Greens co-leader Russel Norman said English was on track to beat the appalling record of the Muldoon Government of 1966-1972 for successive deficits.

"Bill English is using the excuse that milk powder prices have dropped, but no financial manager in their right mind would bank on commodity prices staying at historic highs. His other excuse is low inflation. Which other Finance Minister has used that excuse for poor budget management?" Norman said.

"Clearly the global financial crisis and the Canterbury earthquakes were budget challenges, but the 2010 tax cuts for the top 10 per cent exacerbated the position."

Challenging target
• Prices for New Zealand's largest export commodity, dairy products, have continued to fall.
• Inflation here, as in most of the rest of world, has been running at very low rates.
• The Government remains focused on controlling its spending and returning to surplus this year.
• The Treasury is due to release new forecasts on December 16.