Financial recovery will take 20 years, says English

Finance Minister Bill English

One of the worst yearly economic turnarounds in New Zealand's history will take 20 years to recover from, Finance Minister Bill English said today.

The final government accounts for the year ended June showed a dramatic $12.9 billion annual decline in the headline operating balance - to a $10.5 billion deficit at the end of 2009 compared to $2.3 billion surplus in 2008.

This was due both to the recession and decisions by both the former Labour government and the incoming National Government.

Treasury said it was the worst budget turnaround since comparable statistics began in the 1990s with the move to accrual accounting.

The books showed two rounds of tax cuts reduced revenue by $3 billion with extra spending announced in the 2008 budget on health and education added $2 billion to expenditure, while the lengthening dole queue and indexation of benefit increased welfare spending by $1.5 billion.

Revenue would have been a lot lower except that Treasury booked $1.4 billion in back taxes due from major banks after Inland Re venue successfully challenged their structured finance deals in the courts.

These are still open to further appeal.

The recession was estimated to have reduced tax revenue by $1.3 billion with investment losses and asset impairments costing another $4.1 billion.

The final cash deficit for the 2008/2009 year was $8.6 billion compared to the $2 billion surplus in the previous financial year, which led to a dramatic rise in net debt from 5.7 per cent of GDP in 2008 to 9.5 per cent at the end of 2009.

Around July last year was still predicting an operating surplus of $2.56 billion would be revealed in today's accounts, this was already down from the $7 billion forecast in December 2007.

The signs of gaping holes in the Government books were beginning to appear in July 2008 with Treasury predicting cash surpluses would be a thing of the past for the foreseeable future.

Then the world was hit by the credit crisis and the collapse of many major international financial institutions which brought on a global recession.

This rubbed salt in the wounds of the New Zealand economy which had already been shrinking since the beginning of 2008.

Finance Minister Bill English said the gaps in the books would have to be met by borrowing and this combined with the harm to the economy meant it could be 20 years before the Government books regained the ground lost in the last 20 months.

Government debt could increase to around $70 billion meaning the cost of servicing the debt would rise from around $2.5 billion to more than $7 billion for the foreseeable future.

Net debt would rise from below 10 per cent of GDP to more than 30 per cent over the next 10 years even if the economy grew at fairly robust levels in the coming years.

The Government strategy was to increase debt levels now while it was relatively affordable and before a "tsunami" of international debt swamped the market.

Growth in Government spending had to be brought under control, English said.

Budget 2009 had just been the start of a process which would be ongoing for the next 10 years.

There would not be a "rip and bust" approach but spending would have to be tested for effectiveness with no prospect of budget surpluses for nine years.

English said while the outlook looked bad, New Zealand was better off than most other countries which had been devastated by the collapse of financial institutions and even worse debt problems.

- NZPA