Finance Minister English says government lacks 'tailwind of inflation' to drive big surpluses

The New Zealand government lacks the "tailwinds" of inflation that have helped drive tax revenue and fill the Crown coffers in previous economic cycles, meaning budget surpluses are likely to be smaller and there won't be an opportunity for a big "spend-up," Finance Minister Bill English says.

English delivered an operating surplus before gains and losses (obegal) of $414 million in the 12 months ended June 30, having projected a deficit of $684 million in the May budget, turning around a shortfall of $2.8 billion a year earlier. The surplus ended a six-year run of deficits. The government accounts slipped back into deficit in the first four months of the current financial year, although by less than forecast.

"Looking ahead, the economy is going to make it a bit of a challenge to maintain and grow surpluses," he told the finance and expenditure select committee today. "We're not going to bounce into a period of big surpluses. People think at the end of a period of restraint there's going to be a spend-up. That's not going to happen."

"We've been talking for some time about the challenges of managing the government finances in this world of low inflation, low interest rates and therefore low growth in tax revenue," he told reporters after the meeting. That's a contrast from the past when at this stage of the economic cycle "you've had higher growth in tax revenue so you can see surpluses building up quite quickly."

His comments come ahead of the Half-Year Economic and Fiscal Update (HYEFU) next Tuesday, which will provide updated economic and fiscal forecasts. The May budget projected a surplus of $176 million for the 2016 year, surging to $1.5 billion in 2017, $2 billion in 2018 and $3.6 billion in 2019, the last year in the Treasury's forecast horizon.

He wouldn't go into specifics about the HYEFU next week but said that in the past couple of years "each set of forecasts tended to push back the timing of when you would get to, say, a $1 billion surplus." Interest rates, inflation and dairy forecasts "have consistently turned out to be lower than expected."

Ahead of the fiscal update, the Reserve Bank delivers its latest economic forecasts tomorrow with the monetary policy statement. While there are signs the economy is picking up pace, economists still expect the bank to cut the official cash rate a quarter point to 2.5 percent, returning the OCR to its all-time low. The consumer price index rose 0.3 percent in the third quarter, meeting the Reserve Bank's forecast, for an annual rate of just 0.4 percent.

(BusinessDesk)