The Government has released its Half Year Economic and Fiscal Update showing a slight improvement in the economic outlook, which means the budget is expected to remain in deficit until 2016, rather than the 2018 forecast in May in the depths of the recession. (Update 1 includes ASB economist comment.) Finance Minister Bill English said the budget and economic outlook was a little better, but there were risks the economy could deteriorate again and there was little room for slippage in the government's tight approach to spending. "This reflects the fact that the global economy has stabilised and the success of significant Government initiatives in the past year to fight the recession," English said. "However, that does not mean that all of the problems of the recession have passed "“ risks remain that growth could weaken again," he said. "Unemployment is forecast to peak sooner and lower than previously predicted "“ 7% in early 2010 as opposed to 8% in the second half of 2010. However, it is likely to remain at elevated levels throughout 2010, even as the economy improves. So the year ahead will remain difficult for many New Zealanders." The Government's fiscal position remained challenging. "Budget 2009 stopped the growth of low-value Government spending and provided a credible programme to contain debt. Even so, the forecast operating deficit for 2010/11 is NZ$6.7 billion and the Government's accounts are not expected to return to surplus until 2016." "This is despite the forecasts assuming long-term spending restraint and an upwards creep in average tax rates caused by increasing numbers of taxpayers entering the top tax brackets. There is little room for slippage." Here is the full statement below from Bill English
The Government's firm focus in 2010 will be achieving higher economic growth and giving businesses the confidence to invest and create jobs, Finance Minister Bill English says. Responsible management of the Government's finances will also be essential, with another six years of forecast Budget deficits. "Growth matters because it creates jobs, increases incomes and improves the living standards of New Zealand families," he said today in issuing the Half-Year Economic and Fiscal Update and 2010 Budget Policy Statement. Updated Treasury forecasts show that both economic growth and the fiscal outlook are a little better than forecast in the Budget in May. "This reflects the fact that the global economy has stabilised and the success of significant Government initiatives in the past year to fight the recession. "However, that does not mean that all of the problems of the recession have passed "“ risks remain that growth could weaken again," Mr English says. "Unemployment is forecast to peak sooner and lower than previously predicted "“ 7 per cent in early 2010 as opposed to 8 per cent in the second half of 2010. However, it is likely to remain at elevated levels throughout 2010, even as the economy improves. So the year ahead will remain difficult for many New Zealanders." Mr English says the Government's fiscal position also remains challenging. "Budget 2009 stopped the growth of low-value Government spending and provided a credible programme to contain debt. Even so, the forecast operating deficit for 2010/11 is $6.7 billion and the Government's accounts are not expected to return to surplus until 2016. "This is despite the forecasts assuming long-term spending restraint and an upwards creep in average tax rates caused by increasing numbers of taxpayers entering the top tax brackets. There is little room for slippage." The Government has a significant economic programme, which has already helped New Zealand come through the recession in better shape than many other countries. The economic programme includes:Here is ASB economist Jane Turner's take on the figures:"We are now building on that programme to ensure New Zealand achieves a step-change in its economic performance," Mr English says. "Budget 2010 will set out the next steps of the Government's growth strategy while continuing the emphasis on sound public finances."
- Investment in productive infrastructure
- Removing red tape and improving regulation
- Supporting business innovation and trade
- Improving education and lifting skills
- Lifting productivity and improving services in the public sector
- Strengthening the tax system
As expected, the Crown Accounts look a lot healthier in the medium term. Part of the improvement is based off expectations of a better economic environment and part is based on careful expense management. Consequently, the Government's funding requirement is starting to taper off significantly in the latter years of the forecast horizon. Rating agencies should be a lot more comfortable with the evident improvement n the fiscal outlook. For governments that are issuing large amounts of debt in the short term, it will become increasingly important to demonstrate some sort of exit strategy. NZ is starting to do that.
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