8 Dec 2016

Economy expected to stay stronger for longer

5:05 pm on 8 December 2016

The government expects the economy to stay stronger for longer, filling its coffers with higher tax revenues and giving it larger budget surpluses over the next four years.

The Half Year Economic and Fiscal Update is forecasting economic growth of 3.6 percent in the current year, and 3.5 percent the following year, before it eases to about 2.3 percent by 2021. The forecasts are considerably stronger than those in the May Budget.

Christchurch construction.

Finance Minister Bill English said the forecast was driven by high levels of construction activity, exports, a growing population and interest rates. Photo: RNZ / Alexander Robertson

The economic gains flow through to the government's books, with estimated budget surpluses also revised higher.

The surplus for the current year has been trimmed to $473 million for the current year, but that also allows for an estimated $1 billion hit from the Kaikōura earthquakes.

By June 2021, a surplus of $8.5bn has been forecast, and the increases are being earmarked for spending on unspecified capital and infrastructure projects.

Net debt will fall below 20 percent of GDP a year earlier than forecast, so the government is now likely to resume payments to the New Zealand Superannuation Fund in 2021.

Treasury has estimated the total fiscal cost of the Kaikōura earthquakes to be between $2bn and $3bn, some of which would be covered by insurance and other existing funds. It said $1.5-2bn of the cost would be on transport infrastructure - namely rail and roads. It expected Earthquake Commission claims to be about half a billion dollars.

$1 billion of that cost has been included in this year's forecasts.

Unemployment is forecast to drop slightly below the 2016 rate of 5 percent, to 4.8 percent, and dropping to 4.3 percent in 2021.

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Finance Minister Bill English Photo: RNZ/Elliott Childs

Finance Minister Bill English, who is the favourite to become the country's next prime minister next week, said the more positive economic outlook was driven by high levels of construction activity, exports, a growing population and interest rates.

"They give us positive options for the future," he said.

And he said while the Kaikōura earthquakes have had a "major impact on affected families and businesses", he said they were not expected to disrupt the "overall momentum of the economy".

He has confirmed the allowance for new spending in each of the next four budgets would be $1.5bn.

However, capital spending has been boosted by $2bn, to $3bn in Budget 2016, for what Mr English described as "a number of high quality infrastructure and investment projects".

Treasury agrees with the Reserve Bank that net migration is likely to start dropping off, which means growth would also slow.

"In combination, this is forecast to increase upwards pressure on wages and prices.

"In response to increasing price pressures, interest rates are forecast to begin rising in late 2018, which would contribute to slower demand growth and stabilise consumer price inflation at 2 percent."

Labour's finance spokesperson Grant Robertson said the lives of many New Zealanders were still no better, despite the positive economic outlook in the latest update of the government books.

"At the high level indicators, there are certainly signs of growth in our economy, but I think most New Sealanders will look at those numbers and say 'why haven't my wages increased in the past year, I've got big house price increases, big rent increases'. New Zealanders are just not seeing the benefits of that kind of economic growth."