The Government believes an OBEGAL surplus is achievable this financial year, despite Treasury’s latest forecast predicting a $572 million deficit (0.2 per cent of GDP) for the year to 30 June 2015, Finance Minister Bill English says.
“These forecasts emphasise the unusual conditions the New Zealand economy is experiencing,” Mr English says. “Treasury is predicting solid growth, growing employment and low interest rates, which help New Zealanders to get ahead. But at the same time, falling dairy prices and low inflation are restricting growth in the nominal economy and government revenue.
“This is making it more challenging for the Government to achieve surplus in 2014/15. However we remain on track to reduce debt to 20 per cent of GDP by 2020.
“Although this latest Treasury forecast predicts a small deficit for the current year, we believe the strong underlying economy and responsible fiscal management can deliver a surplus when the final government accounts are published next October,” Mr English says.
Whether we return to surplus this year or next, the government’s careful management has turned the economy around in the face of financial and natural disasters and has protected the most vulnerable people while doing it.
Previous forecasting rounds show the outlook can change significantly between the Half Year Update and the final accounts being published. As recently as 2012/13, the final OBEGAL deficit was $2.9 billion smaller than the previous HYEFU forecast.
“The Government has a track record of sticking to our spending plans to protect the most vulnerable and to provide certainty for users of public services. We won’t be changing that approach,” Mr English says.
“Despite the lower than expected revenue forecasts, the Government’s ongoing commitment to spending restraint means the public finances continue to improve significantly each year.”
The OBEGAL deficit has shrunk significantly from a peak of 9 per cent of GDP in 2010/11. Net core Crown debt is expected to peak in the current fiscal year at 26.5 per cent of GDP and then reduce to 19.1 per cent of GDP in 2020/21. A residual cash surplus is now expected in 2017/18, a year earlier than forecast previously, which is also when the Government intends to start repaying debt in dollar terms.
The Budget Policy Statement released today confirms that allowances for Budget 2015 and Budget 2016 have each been reduced to $1 billion. The allowance has been re-phased over three years to provide a $2.5 billion allowance in Budget 2017.
“This will allow us to consider modest tax cuts and/or additional debt repayment in Budget 2017, as economic and fiscal conditions allow,” Mr English says.
Treasury’s forecasts suggest that New Zealand’s economic growth potential before inflation sets in – essentially the speed limit of the economy – is higher than estimated previously.
New Zealand recorded 3.9 per cent economic growth over the year to June, which was one of the higher rates among developed countries. Other positive economic indicators include:
- GDP growth is expected to average almost 3 per cent over the next five years, better than the Euro area, the US, the UK, Japan and Canada.
- Interest rates are staying lower for longer, with mortgage interest rates still just above 50-year lows.
- Household disposable income is increasing faster than inflation – rising 9 per cent in real terms in the last four years. It is forecast to increase by another 9 per cent over the next four years.
- Recent job growth is expected to continue. There are 72,000 more people employed now than there were a year ago. An additional 153,000 people are forecast to be in work by mid-2019.
- The average full-time wage is expected to rise by $8,000 to around $64,000 by mid-2019.
- Unemployment, currently at 5.4 per cent, is forecast to fall to 4.5 per cent by 2018.
“Achieving those goals is possible only with a continuation of the sustained economic growth this Government’s careful economic management is helping to deliver,” Mr English says.
Most other countries would envy us these indicators.