N.Z. Projects First Budget Surplus in 7 Years, Eyes Tax Cuts

New Zealand’s government projected the first surplus in seven years and raised the possibility of future tax cuts in its final budget before September elections.

The operating surplus will be NZ$372 million ($322 million) in the year through June 2015, up from a previously forecast NZ$86 million, Finance Minister Bill English said in his annual budget today in Wellington. Surpluses will climb to NZ$3.49 billion by 2018, less than the NZ$5.62 billion projected in December. There will be a deficit of NZ$2.45 billion in the current year through June, the budget shows.

English and Prime Minister John Key are campaigning for a third term in office with a message of sound financial management as the economy rebounds from recession and a series of devastating earthquakes in the South Island city of Christchurch. They square off in the Sept. 20 election against a main opposition Labour Party proposing tax increases for the highest income earners and new tools to control inflation.

“Election lollies will be on offer a little later this year, but they will be small,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. “Given the still-constrained fiscal environment, there is not much for financial markets or voters to get excited about.”

Tax Cuts

English today dangled the prospect of “modest” tax cuts, saying an improving fiscal outlook will allow the government to raise the limit for new spending without stoking inflation and pushing up interest rates. The new spending allowance will increase to NZ$1.5 billion next year from NZ$1 billion this year and grow at 2 percent each budget thereafter, he said.

“Treasury advises that lifting the annual allowances to NZ$1.5 billion a year is around the upper limit for increased spending without materially impacting on interest rates,” English said. “This moderate increase will provide the government with future options around investment in public services and modest tax reductions.”

Interest rates are shaping as a central theme for the election. Reserve Bank of New Zealand Governor Graeme Wheeler has raised the benchmark rate twice this year after it was kept at a record-low 2.5 percent for three years to help fuel the economic recovery. The speed and extent of further increases will depend on economic performance and how much the nation’s strong currency damps inflation, Wheeler said last week.

Strong Dollar

“Today’s budget is unlikely to surprise the RBNZ and we continue to expect a rate hike from the central bank in June,” HSBC Global Research economists Adam Richardson and Paul Bloxham wrote in a note.

The outlook for higher borrowing costs has pushed up New Zealand’s dollar, which traded at 86.69 U.S. cents at 4:05 p.m. in Wellington, little changed after the budget’s release.

The currency will “remain elevated” in coming years, constraining export growth and contributing to a widening of the current account deficit to 6.3 percent of gross domestic product in 2018, the Treasury said in the budget papers.

It nevertheless raised its forecasts for GDP growth, predicting it will accelerate to 4 percent in the year through March 2015 from 3.4 percent a year earlier. The pace of expansion will slow to 2.4 percent in 2016, the forecasts show.

Growth is being driven by the Christchurch rebuild, near-record terms of trade, strong immigration and stimulatory monetary policy, while fiscal policy and the exchange rate are providing some offset, Treasury said.

More Jobs

It forecast the jobless rate will drop to 4.4 percent in 2018 from a projected 5.4 percent next fiscal year.

Standard and Poor’s Ratings Services and Moody’s Investors Service both said the budget had no implications for New Zealand’s credit ratings.

New Zealand’s 2014-15 forecast surplus compares with a projected Australian deficit of A$29.8 billion ($27.9 billion) for the year through June 2015, according to that nation’s budget papers released in Canberra May 13. Australia didn’t predict a return to surplus during the four-year forecast period.

“New Zealand is among the first developed countries to achieve a return to normal economic settings,” English said in his budget speech to parliament today. “We are looking ahead with confidence.”

New Zealand’s net debt was 26 percent of GDP in 2013, compared with an average of 73.5 percent for advanced economies, according to the International Monetary Fund’s April fiscal monitor. The figure will to rise to 26.4 percent of GDP in 2015 before declining to 23.8 percent by 2018, the budget documents show. English said the government remains on track to reduce net debt to 20 percent of GDP by 2020.

Christchurch Earthquakes

Net debt has swollen from less than 10 percent of GDP in 2009 as the government borrowed to help meet the estimated NZ$40 billion cost of the Christchurch earthquakes, which struck in 2010 and 2011. A quake in February 2011 killed 185 people.

The government raised about NZ$4.7 billion from selling minority stakes in four state-owned companies over the past year to reduce its need for extra borrowing.

The budget contains a NZ$500 million package of extra support for children and families over the next four years. It includes NZ$172 million to extend the paid parental leave entitlement and NZ$90 million to fund free doctor visits and prescriptions for children under 13.

The governing National Party had 47.6 percent support in a Fairfax poll of 1,011 people this month compared with 29.5 percent for Labour. Labour could still oust National if it forms an alliance with other opposition parties such as the Greens and New Zealand First.

Labour said this week it would post budget surpluses, reduce debt and lower the jobless rate to 4 percent by late 2017, without providing further details. Last month it proposed using a national pension savings program as an additional tool for controlling inflation, arguing it would reduce the need for interest-rate increases and lead to a lower exchange rate.

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