Dipping economy will cause belt tightening, says Treasury

People will be spending less in the coming year as they face up to falling house prices, high interest rates and increasing fuel costs, Treasury predicted today.

The Government's financial advisor said high personal spending in recent times on the back of a housing boom and cheap credit was coming to an end more sharply than it previously predicted.

Many households were now having to face higher mortgage costs as long term mortgages expired and had to be refinanced.

Treasury also estimated that the 24 per cent increase in fuel prices to March 2006 would add up to $700 million to households' annual fuel bill.

While some people would use their cars less, many would have to reduce their spending elsewhere, Treasury said.

Any further increases in oil costs would just bring further belt tightening.

Those hoping to lever more money out of their homes could also be out of luck with Treasury forecasting "average house prices declining 5 per cent in the year to mid 2007".

Treasury are optimistic that the downturn will be mild and short-lived with growth in personal investment beginning to recover in late 2007 as higher export incomes flow through, the labour market strengthens and interest rates fall.

Inflation is expected to stay above or around 3 per cent in the coming years, which means that any interest rate relief is unlikely until March 2007.

Tougher times for households in the months ahead will be reflected in a gloomier time for the general economy as well.

Average economic growth of around 3.5 per cent in the past five years will continue to drop away and is expected to bottom out at 1 per cent in March 2007.

Employment will fall and unemployment will increase from its 20-year low of 3.6 per cent last December to 4.8 per cent in the second half of 2007.

Businesses will be investing less and will be less willing to pay large pay increases, despite higher inflation levels.

While the fall in the New Zealand dollar will push up import prices and inflation, it will lead to a recovery in agricultural exports and tourism.

The forestry sector is picked as a possible winner in the coming years due to improved prices and demand from trading partners.

The government coffers are also set to follow the general economic cycle with Treasury picking that increases in the tax take will fall.

Growth in tax revenue is forecast to be below 3 per cent per annum in each of the next three years while expenditure growth continues at the same rate.

The shortfall will mean an increase in borrowing to fund the Government's capital expenditure programme.

The squeeze means the Government will have less money available for new spending in the coming Budgets than the previous two Budgets.

- NZPA