Road to recovery remains rocky

Bill English expects the Government's cash position to get worse before it gets better. Photo / Mark Mitchell

Finance Minister Bill English is sceptical that the recent upsurge in confidence foreshadows an economic future much rosier than his May Budget assumed.

Budget forecasts outlined a gradual recovery, that after contracting last year and this year the economy would grow around 2 per cent next year, 3 per cent the year after and 4 per cent in 2012.

"I haven't seen evidence that we should change our outlook much from what it was in May," English told the Weekend Herald yesterday.

"I wouldn't read the short-term signs of better confidence as a sign that everything is going to be better. And that is the sense I got overseas too [on a recent trip around the financial capitals], that you shouldn't read exuberance in equity markets as a measure of what was happening in the real economy," he said.

"When you have trading partners that are showing signs of liquidity-driven recovery you have to be a bit cautious that when that liquidity is withdrawn and they stop printing money and pull back on stimulus - which they have to at some stage - that is going to take some negotiating."

The consensus forecast for weighted average growth among New Zealand's trading partners is 2.9 per cent next year and 3.3 per cent in 2011. That is a marked improvement on the 1 and 2 per cent growth respectively assumed at Budget time.

But the exchange rate is much stronger than assumed then. "So you might not get the flow-through," he said.

"So I'm a bit more cautious than the consensus that the outlook has changed a lot in the last two or three months.

"We always said the road to recovery would be pretty rocky."

This week the Government reported an operating deficit of $10.5 billion for the 2008-09 year and a cash deficit of $8.6 billion.

Even with the forecast economic recovery the Government's cash position would get worse before it got better, he said.

"We don't see any quick fix."

On the spending side the Government would stick to the constraints outlined in the Budget, which allowed only $1.1 billion a year for additional operating spending.

That fiscal discipline had been a central part of his message during the recent roadshow, to reassure offshore lenders that the Government would get its debt under control.

"On the revenue side we are having a look at whether there is a better tax mix."

The Government wanted to tilt the playing field in favour of saving, investment exports and away from debt and consumption, English said.

Any tax changes would have to have a sufficient payoff to justify the political risks of making changes, especially as there were no longer surpluses that could be used to sweeten the deal.