New Zealand Sees Slimmer Budget Surpluses as Growth Slows

New Zealand’s government reduced its budget surplus forecasts as plunging dairy prices curb economic growth and near-zero inflation damps tax revenue.

The operating surplus will be NZ$176 million ($129 million) in the year ending June 30, 2016, narrower than the NZ$565 million forecast in December, Finance Minister Bill English said in his annual budget Thursday in Wellington. The forecast for this year’s deficit widened to NZ$684 million from NZ$572 million.

English and Prime Minister John Key won re-election last year pledging to return the budget to surplus in 2015 for the first time since 2008. Plunging prices for dairy products, New Zealand’s biggest export, and inflation at a 15-year low of 0.1 percent will curb forecast tax revenue by NZ$4.5 billion through 2018, according to government estimates.

“Achieving the projected surpluses amidst an uncertain economic outlook will require continued restraint,” Cameron Bagrie, chief economist at ANZ Bank New Zealand Ltd. in Wellington, said in a note. “We’d have liked to see the fiscal numbers looking better before the dividends start to be to redeployed and the likes of tax cuts mooted.”

New Zealand’s currency was little changed after the budget, buying 73.24 U.S. cents at 3:29 p.m. in Wellington.

Surpluses will widen to NZ$1.48 billion by June 2017 and NZ$2 billion a year later -- more than NZ$1 billion less than was forecast in the December half-year economic and fiscal update, the government said.

Fiscal Trajectory

“The overall fiscal trajectory has not changed,” English said in his speech. “The surplus target has helped to turn around the government’s books. We’ve come from an NZ$18.4 billion deficit four years ago to seeing steadily rising surpluses into the future.”

English reiterated the prospect of “modest” tax cuts in 2017, when an election is due, if fiscal and economic conditions allow. He maintained a new spending limit of NZ$1 billion in this budget and next, rising to NZ$2.5 billion in 2017.

The flagship investment in today’s budget is NZ$790 million over four years to address child hardship and includes increased benefits for an estimated 110,000 families from April 1 next year.

“It will be the first time core benefit rates have been increased, apart from inflation adjustments, since 1972,” English said.

Health and education dominate spending plans, with NZ$2.4 billion allocated over four years.

KiwiSaver Plan

The government will save NZ$500 million over four years by stopping a NZ$1,000 payment made to new entrants in the KiwiSaver worker savings plan. It will collect an additional NZ$100 million a year through a levy on international travelers to pay for biosecurity and customs activity at the border.

The Treasury Department cut its forecasts for GDP growth, predicting it will slow to 2.9 percent in the year through March 2016 from 3.3 percent a year earlier. In December, it projected 3.2 percent growth for 2015-16.

Standard & Poor’s said the government’s writedowns to revenue growth were “relatively modest” and wouldn’t have an immediate impact the nation’s AA foreign currency credit rating or its stable ratings outlook.

“We expect external borrowings will rise as a result of a wider current account deficit,” Craig Michaels, senior credit analyst at S&P in Melbourne, said in an interview. “The external vulnerability is a restraint on the rating.”

Immigration, Construction

Economic growth will slow as immigration retreats from a peak, construction activity wanes and interest rates start to rise from 2017, Treasury said.

Inflation will accelerate to 2.1 percent by late 2016, while the jobless rate will fall below 5 percent, it said. The current account deficit will widen to 5.6 percent of gross domestic product in early 2016 then narrow, the forecasts show.

New Zealand’s forecasts compare with a projected Australian deficit of A$35.1 billion ($28 billion) for the year through June 2016, according to that nation’s budget papers released in Canberra May 12.

English said the government remains on track to reduce net debt to 20 percent of GDP by 2020.

New Zealand will offer NZ$37 billion of bonds in the five years through June 2019, up from NZ$36 billion forecast in December, the Debt Management Office said in a statement.

It maintained its NZ$8 billion program in the current year ending June 30 and will offer NZ$8 billion in 2015-16, it said.

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