Lopsided growth fills coffers

The Treasury forecasts a higher tax take and fatter fiscal surpluses than in the Budget three months ago, reflecting an out-of-kilter economy.

The tax base is closely linked to domestic demand, which is cooling more slowly than expected while the export sector struggles, its pre-election economic and fiscal update says.

The forecast track for overall economic growth is little changed from the Budget, but the composition of the growth is skewed more towards the spending than the earning side of the economy.

Growth is expected to slow to 2.2 per cent in the March year, from 4.2 per cent last year. "Some of the rebalancing of the drivers of growth we have been expecting to ... relieve some of the pressures in the economy have not yet eventuated or, at most, are progressing at a gradual pace," Treasury says.

Households continue to build up debt against the value of their housing assets, while low unemployment combines with higher wages to maintain consumer confidence. Exports have grown slower than expected.

Finance Minister Michael Cullen said: "This cycle differs from the previous two by how long the dollar has stayed high. The peak has been much longer, especially against the Australian dollar. That has impacted on parts of the export sector and it keeps imports cheap, encouraging consumption."

Exports are now expected to grow only 1.3 per cent in volume terms in the March year, only half what was expected in the Budget.

The Government has enjoyed an embarrassment of riches on the tax front, with $541 million more revenue flowing in the year ended June 30 than expected at Budget time, of which $407 million was from companies or the self-employed.

This year and next year, the tax take is now expected to be $1.7 billion higher than the Budget forecast, of which just under $1 billion is company tax. But corporate profits saw-tooth around and the company tax take is even more volatile, with annual changes swinging between a 25 per cent increase and a 10 per cent fall during the past 10 years.

"With negligible profit growth expected at the trough of the business cycle we expect there will be some tax loss build-up in 2007 ... reducing corporate tax growth over the following years," the Treasury says.

Strong consumption, a high dollar, weak exports and bumper corporate profits have pushed New Zealand deeper into the red in its dealings with the rest of the world. The current account deficit is above $10 billion or 7 per cent of gross domestic product, and the forecasts have it getting worse before it gets better, hitting $12 billion or 7.7 per cent of GDP next year.

The fiscal forecasts have $1.6 billion more cash in the Government's hands over the next four years, heavily concentrated in the the first two years. But inflation is at or near the top of the Reserve Bank's 1 per cent to 3 per cent target band over the next two years.

Cullen said: "Treasury's advice is that we should be careful about spending all of that increased cash. That would be likely to lead to a monetary policy response. So we have to be careful about increasing demand in an economy with a high current account deficit, a tight labour market and high inflation."