New Zealand Projects Bigger Budget Surpluses, Cuts Borrowing

New Zealand’s government projected bigger budget surpluses and said it will borrow less on bond markets as the economy grows faster than it had forecast, boosting tax revenue.

The operating surplus will be NZ$86 million ($71 million) in the year through June 2015 and rise to NZ$1.67 billion a year later, Finance Minister Bill English said in a fiscal update released in Wellington today. That compares with May’s projections of NZ$75 million and NZ$797 million. The surplus will grow to NZ$5.6 billion in 2018, the new forecasts show.

The Treasury Department said the economy is expanding faster than forecast amid record dairy prices, immigration and the rebuilding of earthquake-damaged Christchurch. Growth will peak at 3.6 percent in 2015, it said. The government will borrow less than it had planned on bond markets next year and start to repay debt earlier than previously thought.

“This reinforces the solid state of the New Zealand economy and its fiscal position,” said Stephen Toplis, head of research at Bank of New Zealand Ltd. in Wellington. “What other developed economy is going to grow as quickly as ours without quantitative easing or fiscal stimulus?”

Yields Drop

New Zealand two-year interest rate swap yields fell to 3.7 percent at 2 p.m. in Wellington from 3.79 percent immediatley before the statement. The currency rose to 82.76 U.S. cents from 82.6 cents.

Prime Minister John Key is betting a recovering economy will help his government win a third term at a general election he has indicated will be held late next year. Key’s National Party had 46 percent support in a poll of 1,000 people for TV3 News last month. The main opposition Labour Party had 32 percent and the Green Party, its likely ally, attracted 10.4 percent.

In the current year ending June 30, 2014, the budget will show a NZ$2.32 billion deficit, wider than the May forecast of NZ$2.03 billion reflecting reduced income by state-owned companies, the Treasury said.

Net government debt is expected to be 26.3 percent of gross domestic product by June 30, and peak at 26.5 percent a year later, it said. That compares with a previously forecast peak of 28.7 percent in 2015.

Less Borrowing

The government will borrow NZ$8 billion by selling bonds in the year through June 30, down from the NZ$10 billion program announced in May. The bond program is forecast to be NZ$7 billion in the following two years.

The Debt Management Office will also repurchase NZ$3 billion of April 2015 bonds from January to June, it said in a statement. The changes are in response to a NZ$5 billion reduction in forecast funding requirements as a result of a stronger cash position, it said.

Domestic demand is being boosted by the rebuilding of Christchurch, a stronger labor market and net immigration, the Treasury said. The central bank said last week it will need to start raising interest rates from a record low next year.

New Zealand’s economic growth is forecast to be 2.7 percent in the year ending March 31, 2014, and 3.6 percent the following year, the Treasury said today, raising its estimates from May when it projected 2.4 percent and 3 percent growth.

Spending Restraint

“The signs are now pretty evident that growth has picked up appreciably,” English told reporters. The government will continue to exercise spending restraint “to ensure this fiscal and economic momentum can endure,” he said.

Business confidence rose to near a 15-year high last month, according to an ANZ Bank New Zealand Ltd. survey. Employers added 27,000 jobs in the three months ended Sept. 30, the most in more than six years, Statistics New Zealand said on Nov. 6. House prices rose 9.6 percent in November from a year earlier, the Real Estate Institute said Dec. 12.

Growth has picked up in the second half of 2013 after GDP increased 0.6 percent in the six months through June. A Dec. 19 report will probably show third-quarter growth of 1.1 percent for an annual pace of 3.4 percent, according to the median forecast of six economists in a Bloomberg survey.

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