English Says New Zealand's `Patchy' Recovery Won't Reduce Budget Deficit

New Zealand’s economic rebound is “patchy” and the government isn’t expecting a significant increase in revenue that would help narrow its budget deficit, Finance Minister Bill English said.

“The domestic recovery, although welcome, is quite patchy across different sectors and from region to region,” English said in a speech to the Wellington Regional Chamber of Commerce today. The outlook “won’t bring any dramatic changes to the fiscal forecasts” accompanying the May 20 budget, he said.

English in December projected six years of budget deficits as debt increases and the economy recovers from its worst recession in three decades. The government plans to limit new spending on health and education to NZ$1.1 billion ($780 million) and is considering a package of lower income taxes and a higher sales tax to buoy investment, he said today.

“The government is treading a careful line between consolidating its finances but not doing it so aggressively as to have a negative impact on the economy,” said Craig Ebert, senior markets economist at Bank of New Zealand Ltd. in Wellington. “We will still have quite a material deficit for a number of years.”

The Treasury forecast the economy would expand 2.1 percent this year after contracting 1.9 percent in 2009. The International Monetary Fund yesterday predicted growth would accelerate to 2.9 percent this year and 3.2 percent in 2011.

The economy “is recovering slightly more strongly than the Treasury forecast in December and that growth is predicted to strengthen in the year ahead,” English said.

Economic Headwinds

Still, New Zealand faces headwinds from a fragile global recovery while household finances are extended, English said. The high exchange rate against the U.S. dollar and the British pound is hampering exporters, he said.

New Zealand’s dollar has surged 28 percent against the U.S. dollar in the past year. Exports make up 30 percent of the economy.

In December, the government forecast the budget deficit would widen to NZ$10.09 billion in the year ending June 30, 2010, and NZ$11.35 billion a year later.

“There may be slightly stronger revenue and slightly slower spending on income support but nothing that significantly eases our medium-term fiscal pressures,” English said.

Earlier this month, the IMF said the government should make deeper spending cuts to eliminate its deficit sooner.

‘Low Quality’

The government has identified as much as NZ$1.8 billion of “low-quality” spending that it will redirect into priority areas through 2014, English said today, without providing details.

“Its critical the government continues to responsibly manage public finances,” he said. Government agencies should expect no budget increases over the next five years, he said.

The government is working on a tax reform package to encourage saving and investment. The reforms include lowering income tax rates across the board to give people incentives to stay and work in New Zealand, English said.

To ensure the tax changes don’t add to debt, the government will also raise the level of sales tax, he said, without providing any details.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net

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