Budget 2005: Treasury predicts slowing growth

Treasury forecasts in the 2005-6 budget confirm economic growth is picked to fall sharply in the year to March 2006.

Treasury forecasts growth to fall to 2.3 per cent in 2006 from 4.2 per cent in 2005 as capacity constraints, slowing migration, and the effects of higher interest rates and the strong currency bite.

However, Finance Minister Michael Cullen said the economy could still forward to a "soft landing".

Treasury is predicting a faster recovery from the mild slowdown than the Reserve Bank and private sector economists and its own prediction in December.

Growth is forecast to be at 2.5 per cent in 2007 before rising to a healthy 3.5 per cent rate in 2008.

The main economic concern is the rise in the current account deficit to around 7 per cent of GDP in late 2006 and early 2007.

Even at the end of forecast period in 2009 the deficit remains at 6.1 per cent of GDP.

Dr Cullen said the chronic current account concern was behind the introduction of his "KiwiSaver" scheme initiative announced today, worth $588 million over four years.

Treasury has a lower track for inflation than the Reserve Bank. The CPI is forecast to remain around 2.8 per cent over the next three years -- close to the top of the Reserve Bank's 1-3 per cent target.

Employment growth is forecast to slow while wage growth will pick up as result of price pressures in the labour market.

Export volume growth will decline in the March year as a result of the high exchange rate. Import growth is picked to slow, assuming that the New Zealand dollar falls,

Dr Cullen said that tax cuts projected at $1.9 billion over four years should provide some fiscal stimulus to help re-ignite growth.

However, he said the tight capacity constraints mitigated against large scale fiscal expansion.

"As always, too much jam now is likely to lead to only crumbs later," he said.

- NZPA