17 Dec 2013

Growing economy keeps Govt finances on track

9:31 pm on 17 December 2013

The Government has confirmed it will spend an extra $1 billion in next year's Budget as it remains on track to return to surplus by the middle of 2015, underpinned by an expanding economy.

In its half year economic and fiscal update, the Treasury upgraded its forecasts of economic growth and the state of the Government's books.

Treasury Secretary Gabriel Makhlouf, left, and Finance Minister Bill English.

Treasury Secretary Gabriel Makhlouf, left, and Finance Minister Bill English. Photo: RNZ (file)

The Treasury is picking the accelerating economy to peak at 3.6% in the March 2015 year, driven by the rebuilding of earthquake-hit Canterbury, before easing to an average of 2.3% in the following five years.

The stronger economy will bolster the Crown's accounts, with the deficit forecast to decline to $2.3 billion in the 2014 March year, before returning to growing surpluses in following years.

A small surplus of $86 million is expected in the June 2015 financial year, compared with a $75 million surplus forecast in May's Budget. Total debt will peak at a lower $65 billion also in 2015, due in part to asset sales.

Finance Minister Bill English confirmed the new spending of $1 billion for the 2014 Budget, with most of that earmarked for health and education.

He conceded on Tuesday that the predicted surplus of $86 million is small - but it's a surplus all the same.

By 2018, the Treasury is forecasting the surplus will rise to $5.62 billion. Mr English said this means that the Government now expects to start repaying debt in 2016-17.

Labour's finance spokesperson David Parker said that is no surprise, given the $40 billion rebuild of earthquake-hit Canterbury and the best terms of trade in 40 years are helping lift economic growth.

"Neither should we be giving too much credit to the Government for after five deficits creeping back into surplus - I'm sure we would've done that too."

Mr Parker said households still face tough times, particularly as mortgage interest rates are set to rise in 2014, and the Treasury is still forecasting unemployment to remain above 5% until 2018.

Bill English is not promising that the forecast surplus in 2018 will mean more spending or tax cuts in later years.

"We'll be pretty careful about that because we learnt from the mid-2000s where you have a growing economy, if you have a blow-out in government spending and runaway house prices, it's just pouring petrol on the fire. People need to remember we ended up with 10 percent first mortgage rates - double what they are today."

Impact of asset sales

Russel Norman.

Russel Norman. Photo: RNZ

The Treasury's update reveals the Government's projected surplus is $108 million lower because of its sale of shares in state-owned electricity companies.

Bill English dismissed the estimate of the impact of share sales on the forecast surplus of $86 million next financial year.

But Green Party co-leader Russel Norman said on Tuesday it is now clear that the sales have lost the Government money.

"These companies earn over 10 percent on capital. The cost of capital to the Crown is less than 5 percent and the resulting difference between the two is why you end up with the Government worse off by $100 million every year forever as a result of asset sales."

Dr Norman said if the Government had not sold the shares, it would have doubled its forecast surplus.