KEY POINTS:
Government debt and spending deficits are at risk of spiralling out of control and will need to be reduced in next year's budget, Finance Minister Bill English said today.
Treasury has released its latest economic forecasts today painting a grim picture of the outlook predicting massive increases in debt as the Government racks up ever increasing deficits.
Gross debt is set to almost double to 33 per cent of GDP by 2012-2013 as unemployment rises to 6.4 per cent and the Government racks up ever increasing deficits due to a shrinking tax take.
Treasury's uncertainty about the outlook led to it highlighting three very different scenarios depending on how bad the world economy performed over the next few years.
In one scenario unemployment could double to more than 7 per cent if trading partners went into long term recession.
English has pledged to not cut key spending areas such as superannuation and said a capital spending boost of $5.8 billion over the next five years would be used to boost the economy.
Treasury said the predicted levels of debt, even though they came from a low base, were beyond prudent and English said his first budget in 2009 would be an austere one.
The plan would be to protect New Zealanders in the short term by boosting some capital spending but pruning other areas.
The previous government had not put aside money for many commitments it had made and English said new ministers were still unsure of the full impact of the risks to the budget that existed.
Unfunded promises would be dropped and "wish lists" such as large increases in rail infrastructure would have to be re-examined to see if they made sense, English said.
Departmental bosses would be called into see English and Prime Minister John Key this afternoon to be told that the upcoming budget would result in ministers focusing on their campaign pledges with little or no room for new spending bids.
There would be an emphasis on controlling growth in the cost of government administration.
New Zealand had been in recession all year, well before the world economy started getting in trouble, and English said he believed New Zealand was still in recession and he did not know when it would end.
Next year would be tough for everyone and his "gut feeling" was the world economy would not be bouncing back in the short term.
"I dream about surpluses ... but they are not going to happen in the short term," English said.
New Zealand had to get higher growth than predicted or else it would face a tough few years and government policy would concentrate on that.
Economist Shamubeel Eaqub, from Goldman Sachs JBWere said Treasury was again taking an overly-optimistic view of the wider economic picture.
The release contained few surprises for him and was consistent with his view of a "weak economy requiring stimulus".
The fiscal stimulus will be welcomed, but not large enough to turn the economy around on its own. He expected this to be supplemented by further interest rate cuts from the Reserve Bank.
"The effectiveness of the packages remains to be seen, but direct personal tax cuts should flow through to the economy relatively quickly and increased infrastructure spending should support growth beyond the immediate future."
"The update from the Treasury was largely as we expected. The economic outlook has clearly worsened, this is expected to impact on crown accounts and thus require additional borrowing. Increased fiscal stimulus profile is a welcome relief to an economy entrenched in recession and awaiting the onset of a global recession," said Eaqub.
In a statement just issued, English said the forecasts had "strengthened the government's resolve to raise New Zealanders'incomes by improving productivity and economic growth."
"New Zealanders can be confident that the new government is ready and prepared to manage both the economic challenges we have inherited and those that lie ahead," he said.
2009 and beyond would be tough for many New Zealanders, he said. The coming year in particular will be very challenging for everyone.
English said that beyond the deteriorating forecasts, it was difficult to predict precisely how the "unprecedented global market turmoil" would play out in New Zealand.
Treasury's forecasts of sharply increasing public sector debt and higher fiscal deficits over the next five years were "outside the range" the government considered prudent.
"While New Zealand has one of the lowest levels of government gross debt and net debt in the OECD, the Treasury forecasts show that the government will have to take action to bring debt levels back under control. The government is committed to a range of effective policy responses to ensure the worst-case scenarios for debt and deficits will not happen."
This would include limiting spending growth, "getting better value out of existing spending", ensuring that tax bases were maintained, and ensuring that government assets were managed as effectively as possible.
The Government's policies were focused on sharing the burden of the economic downturn, rather than increasing taxes and cutting spending.
"Cuts to government expenditure in an attempt to balance the books, and which have a substantial impact on demand, would simply push the economy deeper into recession," English said.
"Our current focus is setting in place a plan to manage the New Zealand economy through the global economic turmoil. This will ensure that New Zealanders are as strongly placed as possible to take advantage of better economic times when they come along."
He said immediate steps to be taken included:
* Establishing the true nature of the fiscal risks that now exist.
* Where possible, dropping unfunded commitments made by the previous government.
* Establishing a Budget process for 2009 that sets out the government's immediate priorities.
* Halting growth in the number of people employed in government administration and getting better value out of government spending.
- NZPA/ HERALD ONLINE
