25 May 2012

Budget lays ground for 'sustainable growth'

2:47 pm on 25 May 2012

Finance Minister Bill English says the Budget will lay the foundations for a return to long-term economic health.

Mr English defended the 2012 Budget delivered on Thursday as economists criticised forecasts that underpin the plan to get back to surplus as much too optimistic.

The Treasury forecasts show the Government expects to post a modest surplus of $197 million in 2014/2015.

However, many economists believe the figures are too optimistic and that the Budget will take money out of consumers' pockets, eroding the tax take and driving up Government debt.

Mr English says he's relying on the resilience of households and businesses, not Treasury forecasts, to return the economy to growth.

He says this is vital given the situation in Europe which will make borrowing overseas more difficult.

"The right things are happening to lay the foundation for a more sustainable growth in the long term," he told Radio New Zealand's Morning Report programme.

"In the next ten years we'll have to earn that growth by selling more of our goods and services to the rest of the world, we're not going to be able to borrow it."

Mr English conceded that reduced Government spending meant the economy has been slower to emerge from recession.

Forecasts 'too rosy'

The Treasury completed its economic forecasts for the Budget on 27 April, almost a month before the document was delivered, and economists at the BNZ say the world economy since then has taken a turn for the worse.

Westpac and BNZ economists say budget projections for the Government's books to get back to surplus by 2014/15 look doubtful.

Westpac's economists believe Treasury forecasts for export prices appear much too rosy and say its forecasts for rebuilding Christchurch also look too optimistic.

The BNZ says allowances for $800 million of new spending next year, rising to $1.2 billion the year after, look the most likely to be cut if the surplus target is to be achieved.

The Government says it is on track to achieve a $197 million surplus in the 2014/15 year, down from the $370 million surplus forecast in February's Budget Policy Statement.

The Treasury expects GDP to increase by 1.6% in this financial year, to 2.6% the following year and to pick up to 3.4% in 2013/14.

In each of the two years after that it expects GDP to increase by about 3%, with future growth driven by the eventual rebuilding of Christchurch and reasonable growth in China and Australia.

The Treasury expects that will lead to the creation of a net 154,000 new jobs over the next four years, pushing down unemployment to 4.7% in 2015/16.

BNZ chief economist Stephen Toplis says averaging 3% growth is optimistic given subdued domestic spending.

"Even if Europe doesn't come under a lot of duress and even if China doesn't slow markedly we're going to struggle to see substantial momentum in the domestic economy."

Mr Toplis said Treasury's downside scenarios are closer to the BNZ's core forecasts.

CTU economist Bill Rosenburg said the Budget is built on optimistic assumptions and Treasury has consistently overestimated growth in the economy.

Business New Zealand described the Budget as responsible, though its economist John Pask said the forecast of a drop in unemployment to 4.7% in 2015/2016 might seem optimistic.