New Zealand's government will post deepening budget deficits and sharply ramp up borrowing in coming years to help an economy already in recession deal with impact of the global credit crisis.
The Treasury said it finalised the forecasts in late August and while global market turmoil since had added to the downside risks, it had not materially altered the outlook. "It is quite disconcerting that they can forecast quite a protracted period of deficits predicated on only one year of downturn," said Stephen Toplis, head of research at Bank of New Zealand.
The forecasts, made ahead of a November 8 national election which polls suggest the ruling Labour Party will lose, showed that the balance between government spending and income would swing from a surplus of more than NZ$2 billion (US $1.3 billion) in the year ended in June to a deficit of NZ$5.9 billion in the year to the end of June 2009.
The current fiscal year's borrowing programme will be increased by NZ$400 million to NZ$4 billion and then rise to NZ$6 billion in 2009/10 and NZ$9 billion in the following three years, the forecasts show. A strong fiscal position has been a key factor behind New Zealand's top-level credit rating.
The Treasury produces the forecasts ahead of an election to ensure political parties and voters know the state of finances.
The Labour Party has consistently trailed the opposition centre-right National Party in the polls this year. The New Zealand dollar fell to a low of $0.6460 after the forecasts and renewed unwinding of carry trades, its lowest level since just after the collapse of Lehman Brothers in the middle of last month sent shockwaves through global markets.
Government bonds closed weaker with yields, which move inversely to prices, rising between three and 11 basis points. Finance Minister Michael Cullen said "a rainy day" had arrived for the economy, which contracted in both the first and second quarters of calendar 2008, the common definition of recession.
"We will not have to descend into any slash-and-burn response to the current slowdown as we have done previously in similar situations," he told a media briefing. The Treasury said the fiscal surplus for the year to June 30, 2008 was close to the May budget forecasts. But the budget position would deteriorate over the next five years.
The balance between all spending and income would swing to a deficit in 2008/09 of NZ$5.9 billion from NZ$3.5 billion forecast previously, and to NZ$5.3 billion in 2009/10 from a previous forecast of NZ$3.3 billion. The deepening fiscal shortage would require more debt. The country's net debt level would rise to 13.2 percent of gross domestic product in the year to June 2013 from zero in the year to June 2008.
The forecasts scaled back the growth forecast for the year to March 2009 to 0.2 percent from 1.5 percent, before a recovery to push growth up to 3.4 percent by 2011. The full forecasts are available at www.treasury.govt.nz. The centre-left Labour-led coalition is facing defeat after nine years in office, trailing the National Party by nearly 16 percentage points in a Reuters survey of five main opinion polls.
Cullen said the outlook meant there was no room for further tax cuts or big election promises. Low priority spending might need to be reviewed, he said. The government introduced cuts in personal tax rates worth NZ$10.6 billion over four years on October 1, but the National Party has promised larger cuts and more infrastructure spending if it wins the election.