NZ govt sees budget deficit on weak commodity prices

[WELLINGTON] A sharp fall in commodity prices will hit New Zealand's government revenue and drive the budget into the red this year, the Finance Minister said on Tuesday.

Finance Minister Bill English said a deficit of NZ$572 million (US$442.56 million) was now forecast for the year to June 2015 compared with an expected surplus of NZ$297 million projected in the pre-election fiscal update in August.

The return to a modest budget surplus was pushed out until the 2015/16 fiscal year, and forecasts for later years were increased because growth was expected to stay stronger for longer.

An analyst said the failure to post a surplus this year was of no real consequence. "It doesn't matter, a couple of hundred million deficit or surplus is inconsequential...ratings agencies won't be worried by this at all," said Bank of New Zealand head of research Stephen Toplis.

English said the government tax take would be hit this year by the large fall in dairy prices and low inflation, but a surplus was still possible this year. "The government believes that a strong economy and constrained spending means a surplus is achievable," English told reporters.

The government had made a return to budget surplus and tight controls on spending a priority to reduce the pressure on interest rates and allow a reduction in borrowing and repayment of debt.

The updated forecasts in the half-year economic and fiscal update (HYEFU) showed the economy growing more strongly for longer because of strong business investment, earthquake reconstruction, and migration gains. The tax take has been hit by a near 50-per cent fall in dairy prices this year and annual inflation at 1 per cent, meaning lower prices translate into reduced sales tax returns.

Net debt was forecast to peak in the current fiscal year at 26.5 per cent of GDP, and English said the government committed to reducing that to below 20 per cent of GDP by 2020.

He said the government would not engage in "slash and burn" spending cuts to reach a surplus this year, and NZ$1 billion would still be available for new spending in each of the next two years.

English said government aimed to have about NZ$2.5 billion available for new spending or income tax cuts in 2017, the year of the next general election.

The NZ Debt Management Office reaffirmed its budget borrowing programme of NZ$8 billion in the year to June 2015.

REUTERS