Govt signals further round of cuts

Finance Minister Bill English. Photo / Getty Images

The Government yesterday signalled a further round of belt tightening in the public sector next year as the bill for the Canterbury earthquake and a slower than expected recovery continue to take its finances deeper into the red.

However, Labour says deep cuts to government spending while the wider economy is struggling would be a "disaster", causing "enormous social distress" for little gain.

Crown financial statements for the four months to October show the fiscal deficit, excluding gains and losses on investments, widening to $4.4 billion - $1.95 billion higher than budget forecasts. Core Crown revenue of $1.12 billion was 6.3 per cent lower than forecast as the slower than expected recovery saw the corporate tax take down 28 per cent on estimates and GST was also down slightly as households spent less.

Core Crown expenses were $440 million below forecasts, primarily due to slow progress in signing Treaty settlements that were expected to cost $165 million in the period and $80 million less in social benefit claims than anticipated.

As reported last month, the biggest single item driving the increase in the deficit was the $1.5 billion in Earthquake Commission claims from the Canterbury earthquake. Including gains and losses, such as NZ Super Fund returns that were $1.15 billion better than anticipated for the period, the Crown's operating balance deficit at $2.21 billion was $450 million higher than budget forecasts.

Finance Minister Bill English said the higher deficits reinforced the need for fiscal discipline. While the Government's books had taken a hit as households consumed less, this created "a strong platform for faster growth in the medium and longer term".

But that lower consumption, the weaker global outlook, and the impact of the earthquake meant lower growth and slightly higher deficits in the short term.

"This reinforces the need for sound financial management and ongoing discipline ... if we are to get back to surplus by 2016. That is why the Government is committed to spending restraint for the foreseeable future," Mr English said.

"In the New Year, the Government will consider further decisions around how to increase efficiency in the public sector and how it manages some of its large and growing expenses."

Those decisions would be assisted by a report of the Welfare Working Group, the Government's review of spending on policy and the ongoing response to the report of the Housing Shareholders Advisory Group, he said.

But Labour's finance spokesman David Cunliffe said cuts to public spending risked setting off "a self reinforcing cycle of stagnation by reducing demand in an economy that's already struggling".

"Deep cuts at this time in the cycle would be a disaster, it would cause enormous social distress and they would not actually help the economic picture."