New Zealand Sees Smaller Budget Surplus as Vote Nears: Economy

New Zealand’s government cut its forecast for economic growth and projected smaller budget surpluses as it opened the books a month before a general election.

The surplus will be NZ$297 million ($251 million) in the 12 months through June and rise to NZ$818 million the following year, Finance Minister Bill English said in the pre-election fiscal update in Wellington today. That compares with May’s budget projections of NZ$372 million and NZ$1.26 billion.

English and Prime Minister John Key have highlighted a return to surplus after six years of deficits as they campaign for a third term in office at the Sept. 20 election with a message of sound financial management. While the economy is rebounding from recession and earthquakes, plunging prices for dairy products, the biggest export, may curb growth and leave political parties with less room for election spending pledges.

“Now is certainly not the time to put New Zealand’s good progress at risk with more taxes and sharply higher government spending,” English told reporters. The forecast surpluses “are not large and we already have political parties making expensive promises and commitments,” he said.

New Zealand’s currency extended declines after the report, falling to 84.41 U.S. cents at 12:35 p.m. in Wellington from 84.79 cents yesterday. It is the worst-performing in the past month among 16 major currencies tracked by Bloomberg, as investors bet slowing growth will prompt the central bank to delay further interest-rate increases until 2015.

Slower Growth

Gross domestic product will increase 3.6 percent in the first quarter of 2015 from a year earlier, less than the 4 percent projected in May, the Treasury said in the update. Annual growth will slow to 2.6 percent in the first quarter of 2016 and 2 percent a year later, it said.

Annual growth was 3.8 percent in the first quarter of 2014, the best since 2007, as the economy benefited from a building boom, surging demand for dairy exports and the strongest immigration in 11 years.

Aiding the recovery from a recession in 2008-09 has been the estimated NZ$40 billion rebuilding of the South Island city of Christchurch after earthquakes in 2010-11.

English’s efforts to increase exports to 40 percent of GDP have been hindered by the currency’s 25 percent gain the past five years. The central bank in March became the first from a developed country to raise borrowing costs this year to curb house-price inflation.

Narrow Focus

As Key’s governing National Party pledges fiscal restraint, the main opposition Labour Party has slammed what it calls a narrow focus on exporting commodities such as milk powder and logs.

“Growth under this government peaked in June and halves to 2 percent in coming years,” Labour finance spokesman David Parker said in a statement. “The fiscal update shows that exports will fall from 33 percent of GDP when National came into office to 26 percent of GDP.”

Recent declines in dairy prices have occurred earlier than expected and will provide less support to growth, the Treasury said.

Whole milk powder prices fell to a two-year low this month, according to GlobalDairyTrade auction results. Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, last month said New Zealand farmers will get 29 percent less for their milk this year than in the 2013-14 season.

Housing Demand

Higher interest rates are slowing housing demand and wage growth remains subdued, constraining consumer spending, Treasury said. On the other hand, it said construction in Christchurch and house building in Auckland, home to a third of the nation’s 4.5 million people, are helping the economy and fueling inflation.

Reserve Bank of New Zealand Governor Graeme Wheeler has raised the official cash rate four times this year. In July, he said it was “prudent that there now be a period of assessment” before borrowing costs rise further. There is an 18 percent chance of another increase this year, according to swaps data compiled by Bloomberg at 1 p.m. in Wellington.

Key is betting that the projected return to budget surplus will bolster his National Party’s re-election chances. The government is retaining its forecast of at least NZ$1.5 billion of new spending in each of the next three budgets.

Tax Cuts

While there’s “no room for a significant loosening of the purse strings,” the government intends to “reduce taxes when there is room to do so,” English said.

Labour is pledging new taxes on capital gains and on high income earners to help fund additional spending on health and social policies.

National had 50 percent support in a Colmar Brunton poll of 1,000 voters for Television New Zealand conducted last week. Labour had 26 percent support and its ally the Green Party attracted 11 percent. No party has achieved an outright majority since New Zealand introduced a German-style proportional electoral system in 1996, and governments have needed to rely on the support of smaller parties.

New Zealand’s budget deficit was NZ$2.6 billion in the year ended June 30, 2014, wider than the NZ$2.45 billion projected in May. Forecasts for future surpluses have been trimmed as tax revenue projections have fallen, the Treasury said. The 2017-18 surplus will be NZ$2.96 billion compared to NZ$3.49 billion projected in May.

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