N.Z. Sees 2015 Surplus as Christchurch Rebuild Boosts GrowthTracy Withers
New Zealand’s government projected a small budget surplus in 2015, the first in seven years, as rebuilding earthquake-devastated Christchurch city bolsters economic growth and tax revenue.
The operating surplus will be NZ$75 million ($62 million) in the year through June 2015 from a previously forecast NZ$66 million, Finance Minister Bill English said in his annual budget released today in Wellington. The balance will improve from a NZ$6.29 billion deficit in the year ending June 30, 2013, as the government curbs new spending and sells assets to limit debt.
Prime Minister John Key’s government forecasts the estimated NZ$40 billion rebuild of Christchurch will help lift revenue by boosting employment, residential investment and company profits. The track to surplus will be achieved even as a drought and the nation’s strengthening currency curb the pace of economic growth over the next year.
“We’re on track with reasonably robust tax revenue growth,” English told reporters. “We’re not stretching to reach the target. It has been an important anchor for our growth plans.”
New Zealand’s economy is being underpinned by rebuilding in Christchurch, the third-largest city, after earthquakes that struck the South Island city from late 2010. A February 2011 temblor killed 185 people, destroyed homes and required demolition of more than 1,000 central city buildings.
The economy will grow 2.8 percent in 2014-15 from 2.3 percent in 2013-14, led by earthquake-related investment, the Treasury Department said today. Growth in 2013-14 is slower than the 3 percent rate previously projected, reflecting the drought. The economy grew 3 percent in 2012.
“The budget is in line with expectations as to the path toward balance,” Steven Hess, Senior Vice President, Moody’s Investors Service, wrote in an e-mailed note from New York. “Thus, it does not change our view of the country’s creditworthiness.”
The New Zealand dollar gained 7.9 percent the past 12 months, the best performing Group of 10 currency. It was little changed after the budget was released, trading at 82.52 U.S. cents at 3:05 p.m. in Wellington.
The kiwi will remain elevated against a basket of its largest trading partners this year and next, before falling in the years to 2017, Treasury estimated in the budget papers.
The government’s contribution to the earthquake recovery will increase by NZ$2.1 billion to NZ$15.2 billion, the government said today. That includes a NZ$900 million investment in two hospitals and spending on the university.
Residential investment is forecast to double in the forecast period, mainly as a result of Christchurch rebuilding, boosting revenue from sales tax, the Treasury said. Demand for workers in the city is expected to boost employment by 1.5 percent in the year through March 2014 and 2.7 percent in the following 12 months, boosting the income tax take.
The budget contains new spending of NZ$5.1 billion over the 2013-2017 period, in part paid for by savings and reprioritization, as well as some minor tax adjustments, English said. The government needs to limit spending to achieve its budget surplus target, and will reduce the allowance for new spending in next year’s budget to NZ$1 billion from NZ$1.2 billion, he said.
Housing supply is a priority for the government, English said. The government is introducing legislation that allows councils to create special housing areas where construction can be fast-tracked. It will spend NZ$2.9 billion over three years on new developments and repairs to existing homes, particularly in Christchurch.
Central bank Governor Graeme Wheeler last week said rising house prices reflect supply constraints, particularly in Auckland, and were “problematic” as higher values could stoke inflation and drive up household debt. Prices rose 9.8 percent in April from a year earlier, the biggest annual increase since 2007, the Real Estate Institute said May 13.
Interest rate increases “may be warranted if house-price and credit expansion begin to fuel inflationary pressures,” the International Monetary Fund said in a report on New Zealand published May 14 in Washington.
Wheeler is reluctant to raise borrowing costs as that may stoke demand for the currency. Last week, he said the central bank had sold the currency and was prepared to sell again to attempt to curb its gains.
The government has signed a memorandum with Wheeler giving the central bank the power to enforce balance sheet and lending restrictions on banks if the housing market poses a risk to financial stability, English said today. The so-called macro-prudential tools include proposals to mandate funding ratios or capital buffers, and specify minimum loan-to-property value levels.
To help boost business investment and hiring, the government will cut levies paid to its accident insurance unit by NZ$300 million in 2014-15, rising to about NZ$1 billion a year by 2015-16.
“Businesses are the primary drivers of growth and jobs,” English said. “Reduction in the levies delivers benefits directly to households.”
The government will offer shares in Meridian Energy Ltd., the nation’s largest power company, in the second half of the year, English said. The initial public offering will be the second for the government after it raised NZ$1.7 billion from the sale of 49 percent of Mighty River Power Ltd. earlier this month.
Key’s government wants to raise between NZ$5 billion and NZ$7 billion from reducing its stakes in power companies and the national airline Air New Zealand Ltd. to no less than 51 percent, he has previously said. The proceeds of the sales go to a fund for spending on capital projects and reduce the need for the government to borrow, English said.
Net government debt is expected to rise to 27.1 percent of gross domestic product this fiscal year from 13.9 percent in 2009-10 as the government borrowed to meet the costs of the Christchurch earthquakes. Debt will rise to 28.7 percent of GDP at its peak in 2014-15 and decline to 20 percent by 2020, according to the budget.
The government is delaying contributions to the New Zealand Superannuation fund, set up to pay for future pensions, until the 20 percent target is achieved. The contributions, which were suspended when the budget went into deficit, were expected to resume once a sustainable surplus was achieved.
The projected deficit in the current year is narrower than the NZ$7.34 billion forecast in December’s half-year update because of stronger revenue, the Treasury said. The deficit will narrow to NZ$2.03 billion in the year through June 2014.
New Zealand’s 2013-14 deficit will amount to 0.9 percent of GDP, the budget showed. That compares with Australia’s shortfall of 1.1 percent, according to that nation’s budget papers released in Canberra two days ago. The International Monetary Fund’s fiscal monitor shows the U.S. deficit representing 5.4 percent of the economy, Japan’s shortfall of 7 percent and the euro area’s gap of 2.6 percent of GDP in the period.
The government will offer NZ$10 billion of bonds in the year ending June 30, 2014, down from NZ$14 billion in the current year, the Debt Management Office said in a statement today. Bond sales are forecast to drop to NZ$8 billion in 2014-15.