Cullen calms unrest over Budget surplus forecasts

By VERNON SMALL

The Government is holding firm to its forecasts of strong and rising surpluses, expecting the hesitant recovery in business confidence and a strong export performance to avert a recession.

"Treasury has advised me that it still attaches highest probability to the central forecasts in the Budget," Finance Minister Michael Cullen told Parliament yesterday.

The Budget's central forecasts showed a surplus of $1.01 billion in the year to June 30, 2001, followed by surpluses of $2.1 billion and $2.7 billion in the following two years.

But poor business and consumer confidence and the sharp rise in oil prices has cast doubt on that outcome.

In briefing papers prepared for the OECD, the Treasury has noted that recent data showed a sharper-than-expected slowing in the domestic economy.

"If this transpired, and a stronger contribution from the external sector did not take up the slack, then activity would be weaker than anticipated in our central Budget projections," it said.

Dr Cullen's comments were designed to reassure markets that, despite its comments to the OECD, the Treasury had not officially moved away from its central view.

Under its "weaker domestic demand" scenario, the Treasury expected the surplus to shrink by some $600 million each year. That would mean a surplus of $400 million in the year to June 2001, rising to $1.5 billion and $2.2 billion in subsequent years.

Significant ongoing surpluses are crucial to the Coalition's scheme to partially prepay the cost of pensions, due to get under way next July.

Forecasters are expecting June quarter data to show a slight economic contraction, but most see growth resurfacing in the second half of 2000.

But the Bank of New Zealand, one of the most pessimistic, is projecting a contraction in both the June and September quarters - technically a recession.

It expects the slowdown to deliver a Budget deficit in the June 2001 year, the first since 1993.

Meanwhile, the embattled New Zealand dollar dipped below US43c again yesterday, falling 30 basis points to US42.67c in late trading on the local market.