New Zealand Forecasts Return to Budget Deficit as Growth Slows

New Zealand’s budget will return to deficit this year as plunging dairy prices curb economic growth and benign inflation damps tax revenue.

The operating deficit will be NZ$401 million ($272 million) in the year ending June 30, 2016, compared to a NZ$414 million surplus a year earlier, Finance Minister Bill English said in his half-year update Tuesday in Wellington. In May, the government forecast a NZ$176 million surplus for 2015-16.

English and Prime Minister John Key won a third election victory last year pledging to return the budget to surplus for the first time since 2008. Their efforts to deliver ever-increasing surpluses have been thwarted as slower growth and stubbornly low inflation reduced expansion in the overall size of the economy.

“Dairy prices fell further and faster than was expected,” English said today. “We see continued improvement, if gradual improvement, in the books over the next few years.”

Nominal gross domestic product will be NZ$17 billion less than previously estimated over the period through June 2019, according to today’s forecasts. Tax revenue will be NZ$4.3 billion less over that period than projected in May.

There will be a NZ$356 million surplus in 2016-17 compared to the NZ$1.48 billion projected in May, the government said. The surplus grows to NZ$957 million by June 2018, today’s forecasts show.
English reiterated the prospect of tax cuts in 2017, when an election is due, if fiscal and economic conditions allow. He maintained a new spending limit for the 2016 budget of NZ$1 billion, rising to NZ$2.5 billion in 2017. The capital allowance for 2016 has been increased by NZ$1 billion, English said.
The Treasury Department forecasts GDP growth will slow to 2.2 percent in the year through March 2016 from 2.7 percent a year earlier. In May, it projected 2.9 percent growth for 2015-16.

Growth is projected to pick up to 2.7 percent in 2016-17 and 3.9 percent a year later as dairy prices recover.
Inflation will accelerate to 2.1 percent by early 2017, it said. Prices rose 0.4 percent in the third quarter from a year earlier. The Reserve Bank of New Zealand last week forecast inflation of 1.6 percent by the fourth quarter next year.
Net debt is projected to peak at 27.7 percent of GDP in 2016-17, and the government’s priority remains to reduce net debt to 20 percent of GDP by 2020, English said.
New Zealand will offer NZ$44 billion of bonds in the five years through June 2020, the Debt Management Office said in a statement.

NZDMO maintained its NZ$8 billion bond program in the current year ending June
30, 2016. It increased the program in subsequent years to NZ$9 billion from
NZ$7 billion projected in May’s budget.

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