KEY POINTS:
Government surpluses in the next few years could be up to $2 billion higher than the May Budget forecasts, Bank of New Zealand economist Craig Ebert says.
"We still ain't seen nothing yet," he said.
The Government yesterday reported an underlying operating surplus of $7.9 billion for the year to June 2007, $500 million higher than forecast in May. That does not include the Government's capital outlays on things such as roads. Underspend there pushed the cash surplus to $2.6 billion, $900 million more than the Budget forecast.
"Importantly, much of the underlying build-up in extra cash occurred in the three months to June. At the time of the May Budget the nine months to March figures would have already been counted and in the tin. So the upward surprise is effectively a lot larger when the three months to June are annualised," Ebert said.
Like many private sector forecasters the Treasury had underestimated the pick up in real growth and inflation pressures in the first half of this year. "We believe the Treasury will not only 'bank' the substantially higher starting point but will also project even stronger surpluses, based on upgraded GDP and inflation forecasts, at least for the coming year or two," Ebert said.
The boom in dairy incomes alone would be worth hundreds of millions to the Government coffers.
Finance Minister Michael Cullen said the Treasury was reviewing its forecast revenues upwards.
"Clearly there's fiscal headroom for either more spending or revenue reductions."
But in the short term the Government had to be concerned about adding to inflation pressures, when the Reserve Bank was forecasting inflation to hit 3 per cent, the top of its target band, by the end of this year and to stay there or thereabouts until late 2009. "Nobody would thank us for even higher interest rates or for keeping rates even longer at a high level," Cullen said.
There was also uncertainty about global financial market although the indications were that they were settling down, he said.
Ebert said that what had delivered the higher than expected surplus was the very reason the Government should not recycle it into the economy. "But in the end it will be a political, not an economic decision."
