Govt keeps lid on spending

Finance Minister Bill English. Photo / Mark Mitchell.

Taken at face value the Treasury's latest forecasts have the Budget back in surplus by 2014/15 - a year earlier than expected in the May Budget.

But only just (by $39 million) and only if you ignore the large margin of error around these numbers, illustrated by the fact that the current year's deficit is now expected to be $2.5 billion bigger than the $8.6 billion forecast in the Budget.

So the Budget policy statement released yesterday still talks of return to surplus "no later than 2015/16".

"We will certainly be looking for opportunities to get back to surplus sooner," Finance Minister Bill English said.

The half-year economic and fiscal update is not a mini-Budget. The Government does not announce policy changes. There was, however, a whiff of austerity about it.

The $1.1 billion cap on new money in next year's Budget, and subsequent ones, remains.

But in a sign of further belt-tightening some of that allowance will be set aside to deal with increases in expenses that have in the past been treated as falling outside the allowance - traditionally seen as earmarked for new initiatives.

English pointed to differences in the way education and health spending are treated.

"In health, they get an allocation for the year and that's it. They have to manage their IT and their salaries and their cost of capital all within that new allocation. In the case of education they get an allocation and then if there are any increases in demand, for example in early childhood education, or salary increases traditionally the Government has written out another cheque."

Henceforth such cost increases will have to be clawed back elsewhere in the education budget or take their chances competing for a piece of the $1.1 billion operating allowance.

The cash deficit for the current fiscal year is now expected to be $15.6 billion, up from the Budget's $13.3 billion and representing a borrowing requirement of $300 million a week.

Estimates of the tax take have been cut by $1.4 billion in the current year and a cumulative $3.2 billion over the four years to 2013/14.

But that did not mean spending had been cut by the same amount, English said. Forecasts of inflation have been reduced as well, reducing the cost of inflation-indexed benefit payments. "It pretty much evens out."

The deficit this year is swollen by the $1.5 billion cost to the Earthquake Commission of claims arising from the Canterbury earthquake; beyond that reinsurance kicks in.

But earthquake-related reconstruction is expected to lift economic activity in the year to March 2012 by 0.4 per cent, and to shave 0.3 percentage points off the unemployment rate.

The Government's net debt is now forecast to peak at 28.5 per cent of gross domestic product in the 2014/15 year. In dollar terms that is $70 billion and interest costs are set to more than double to $4.9 billion by 2014/15.

But it is the country's external indebtedness that the Government is focusing on, English said. The current account deficit is expected to blow out from just under 2 per cent of GDP now to $14 billion in four years.

This will drive New Zealand's net external liabilities up from $166 billion now to $221 billion in 2015, or more than 90 per cent of GDP. In order to reduce that vulnerability to "grumpy" international financial markets, we needed to borrow less from them and the only way to do that was increase national savings - which would be a focus of next year's Budget, English said.