26 Oct 2011

Double threat seen to surplus timetable

6:55 am on 26 October 2011

Economists say uncertainty about solving Europe's debt problems and falling commodity prices are real threats to economic growth and the Government's promise to return the books to surplus by 2015.

In the Pre-Election Economic and Fiscal Update, The Treasury expects average growth of about 2.9% over the next four years to March 2016, with the reconstruction of Christchurch offseting weaker global demand.

The Government's operating deficit is forecast to almost halve from a record $18.4 billion in the current June financial year and reduce further before returning to a surplus of $1.5 million in 2015.

Despite weaker global demand and delays to the rebuilding of Christchurch, Finance Minister Bill English says the goal is achievable.

The gap between Inland Revenue's and Treasury's forecasts is, on average, $700 million per year, with IRD the more pessimistic of the two.

Terms of trade are expected to decline 4% over the coming year, reflecting weaker demand and rising supply reducing commodity prices, but ANZ's head of market economics and strategy, Khoon Goh, says that's too optimistic.

He says the rebuilding of Christchurch will contribute to a widening current account deficit of nearly 7% by 2016, which is likely to be viewed unfavourably by credit rating agencies and investors.

Standard & Poor's and Fitch both downgraded New Zealand one notch to double A on 30 September, because of concerns about the country's growing foreign debt.

The economy has been revised upwards to grow 2.3% in the year to March next year, while lowered to 3.4 percent the year after.

The Treasury is now also forecasting the reconstruction of Christchurch will cost $20 billion, compared with $15 billion previously.

Despite the quake burden, net debt is still forecast to peak at 29% of GDP in 2015 from a previous forecast of 29.6%, compared with levels exceeding 100% in countries such as Greece and Japan.