Budget forecast to be in deficit for another decade (Update 1)

The National Government has done enough in the 2009 budget to keep New Zealand's AA+ credit rating, but is still forecasting the budget will not return to surplus until the 2018/19 financial year. (Updated with Standard and Poor's Finance Minister Bill English announced the indefinite delay of tax cuts planned for 2010 and 2011 and suspended full contributions to the New Zealand Superannuation Fund in an effort to get the deficit under control and limit the growth of debt. But the government is still spending an extra NZ$5.8 billion on public services over the next four years and an extra NZ$1.45 billion on new capital spending over the next five years. This includes extra spending on District Health Boards, school buildings, roads, broadband, prisons, police and home insulation. The budget deficit before operating gains and losses (OBEGAL) is forecast to grow to a peak of NZ$9.6 billion in 2011/12 from a deficit of NZ$2.9 billion in the current 2008/09 year and NZ$7.7 billion in 2008/09. Gross debt is forecast to rise to NZ$78.4 billion by 2012/13 from NZ$44.2 billion this year. The OBEGAL is expected to be in deficit until 2018/19 with the current settings. Net Gross debt is forecast to reach a peak of 43% of GDP by 2016/17 from around 9% 24.8% now. Net debt is forecast to rise to a peak of 36% in 2016/17 from 9% now. Without the policy changes announced in this budget, net debt would have risen to over 60%  of GDP by 2023 and still be rising. Gross government debt would have risen to over 70% without changes. This means the government will have to borrow NZ$8.5 billion this coming year, followed by another NZ$21.5 billion over the following two years. Unemployment is forecast to peak at 8% in the second half of 2010 and the economy is still expected to be in recession until the December quarter of 2009. Treasury's downside scenario is for an unemployment rate that peaks at almost 10% in late 2010. Late on Thursday afternoon Standard and Poor's announced it had affirmed New Zealand's sovereign rating at AA+. See the full story here. Moody's also affirmed New Zealand's credit rating here. What I think it means New Zealand kept its AA+ credit rating, but the government has sailed very close to the wind by continuing to spend heavily. It could and probably should have been tougher. Its decision to use government spending to bolster the economy rather than tax cuts could prove self-defeating if mortgage rates rise sharply and the economy remains stuck in the mud of a recession because of a lack of tax cuts. That's because the picture painted in this budget is distinctly ugly, particularly over the longer term. The idea that the budget will be in deficit for another decade is astonishing. Our government will be borrowing upwards of NZ$50 billion over the next 5 years. To put that in context, New Zealanders built up their savings in bank accounts to around NZ$90 billion over the last 50 years. This heavy borrowing will push up longer term interest rates, that will filter through in higher mortgage rates. Unless there is a massive improvement in economic growth rates in the coming decade, New Zealanders can give up on the prospect of tax cuts and may not have enough money in the New Zealand Super Fund kitty to support reasonable pensions by 2020. There will have to be significantly stronger growth to see that happen. If the economic outlook worsens, there may even need to be tax increases to avoid a credit rating downgrade and to fund the retirement of baby-boomers after 2025. Your view? Comments below please