New Zealand Deficit Will Be Wider Than Forecast, English Says

New Zealand will forecast a wider budget deficit this year than previously estimated as low inflation slows revenue growth, Finance Minister Bill English said.

The May 21 budget will show a deficit for the year ending June 30 that exceeds the NZ$572 million (NZ$435 million) forecast in the December half-year update, English said in a speech in Wellington on Friday. The forecast for the 2015-16 surplus will be smaller than the NZ$565 million previously projected, he said.

Prime Minister John Key in September won re-election for a third term pledging to deliver a budget surplus this year, the nation’s first since 2008, and tax cuts in 2017. While Key has maintained there’s still a chance of a surplus when final accounts are tallied, English says inflation at a 15-year low of 0.1 percent is hurting government revenue.

“Lower-than-expected revenue, as well as some quite significant non-cash items in the government accounts, means getting back to surplus is more challenging,” he said today. “While progress on surpluses is slower than expected, we are on track to surplus and repaying debt.”

The Treasury now expects nominal gross domestic product over the four years through to 2019 will be about NZ$15 billion smaller than forecast in last year’s budget, mainly due to slower inflation, he said. It is the size of the nominal economy that drives income, company and sales tax receipts.

As a result, the government will collect NZ$4.5 billion less tax revenue over the next four years than it expected.

Imposed Discipline

English said his focus remains on containing spending, with core expenses dropping to less than 30 percent of GDP within a couple of years from 35 percent in 2011.

The surplus target “has imposed a discipline on us and on government agencies to work hard on achieving value for money and providing new spending only where we can get better results,” he said.

The government remains committed to further reductions in income tax rates or thresholds “when fiscal and economic conditions permit,” he said. It will keep its NZ$1 billion annual operating allowance for this year’s budget and in 2016.

“A small deficit, should it eventuate this year, isn’t a risk to the economy,” English said. “Because we’re confident about the ongoing improvement in the government’s finances, it won’t constrain our decision making in the budget. We will not be pursuing cuts in services or income support in a knee-jerk response to lower tax revenue.”

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