Treasury more upbeat about growth, though revenue risks remain

Tuesday 15th December 2009

The Treasury has joined the growing consensus in revising up their economic forecasts, saying New Zealand came through the global financial crisis in better shape than most of its traditional trading partners, though there are still risks around growth and tax revenue in coming years.

The government department is more upbeat than it was in the May Budget, and now forecasts an economic contraction of 0.4% in the 12 months ended March 31 2010, compared to a 1.7% decline forecast in the Budget.

It increased its growth outlook to 2.4%, 3.2% and 3% over the following three years, from 1.8%, 2.9% and 4% previously.

The Treasury forecasts bring it in line with the New Zealand Institute of Economic Research’s consensus forecast out today, which predicts a 0.4% contraction in 2009/10, and growth of 2.8% and 3% in the subsequent years.

Still, it lags behind the bullish view of the central bank, which is picking annual growth of 3% and 4% after this year’s contraction.

“Treasury’s expectations are for a stronger recovery over the next few years,” Finance Minister Bill English said in a media conference in Wellington. “Even on these assumptions we’re not going to get back to pre-recession levels till late 2010.”

New Zealand’s economy climbed out of its deepest recession since 1991 in the second quarter this year, as house prices rebounded on an inflow of returning expatriates and new migrants amid a shortage of new housing, while record-low interest rates stoked demand for housing.

The national median house price remained strong at $355,000 last month, according to Real Estate Institute data. English stopped short of criticising the property recovery, though he said the country still needs to rebalance its economy through increased exports.

The Treasury doesn’t expect export growth until the March 2012 year, with high levels of indebtedness and a strong kiwi dollar continuing to hamper its revival.

Treasury predicts property prices will rise 10% in the March 2010 year after a fall of more than 9% in the year to March 2009. The Treasury cut its projections for the track of net debt as the government looks to rein in rising interest costs as public debt treble by 2014 to $64.9 billion.

The department predicts the government accounts will keep debt to below 30% of gross domestic product, whereas it expected it to rise to 30.9% in 2013.

The outlook for tax revenue was grim, with Treasury predicting a $400 million shortfall in the 2010 budget as business tax is expected to remain subdued.

The Treasury expects core Crown tax revenue to be lower than its May forecast this year at $51.2 billion, though it has increased its projections in the following three years.

Unemployment is now predicted to peak at 7%, down from its 8% forecast in the May budget, though employment isn’t expected to bounce back as strongly after businesses opted to keep staff on shorter working weeks rather than lay them off.

Businesswire.co.nz

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