The events calendar for New Zealand turns heavier over this week, with the key event being the new National Government’s first Budget on Thursday.
The stakes are high for this year’s Budget. Government revenues are falling dramatically as the global downturn hits the domestic economy hard, while the legacy of the previous Government’s bigspending ways is that expense growth is well entrenched and rising. If previously budgeted increases in new spending were retained, it is expected that operating deficits would reach $10bn per year indefinitely and that Crown gross debt would hit 45% of GDP by 2013 (from 17.5% in 2008) and 70% by 2023. For a small economy that is already highly dependent on foreign funding, that is an untenable situation. Standard & Poor’s has already stated that the Government will need to convincingly demonstrate how it intends to rein in spending, in order for New Zealand to retain its AA+ credit rating.
The economic backdrop underpinning the fiscal outlook has deteriorated further since the December economic and fiscal update, and is downright ugly relative to the last full set of forecasts released in the Pre-Election update (PREFU) on October 6 last year. The growth outlook is now even worse than the supposed downside scenario presented in December, in which trading partner growth of 0.4% and 1.6% was forecast for the 2009 and 2010 calendar years. The most recent predictions from Consensus Economics put trading partner growth at a shocking –2.3% for 2009 and +2.0% for 2010. Falling commodity prices and weaker demand pressure will also see the Treasury lower their inflation and terms of trade forecasts relative to the downside scenario in December, resulting in much weaker growth in the nominal economy. The Finance Minister has indicated that nominal GDP is expected to fall short of the PREFU forecasts by a total of $50bn over the three years to 2012, which implies a shortfall of tax revenues in the order of $20bn.
This means that some tough decisions need to be made. The Government has already indicated that the tax cuts earmarked for 2010 and 2011 and the annual contributions to the Super Fund over the next few years will more than likely be postponed. The Government is also going through a rigorous process of assessing and reprioritising all spending decisions, and recent commentary suggests that some significant savings have been and will continue to be made.
