NZ economic outlook deteriorates

The Government's books will bleed red ink for the foreseeable future, Treasury predicted today.

Releasing the Pre-Election Fiscal and Economic Update (Prefu) ahead of the November 8 election, Treasury said the outlook had deteriorated sharply since the May budget.

Revenue was predicted to be down by just under a $1 billion a year until 2012/2013 and Government costs were rising.

The forecasts made grim reading for any politician hoping to make big spending promises in the election campaign and showed that on current spending there was less than $500 million in the kitty for next year's budget.

Cash deficits - the bottom line after all infrastructure funding and payments to the New Zealand Superannuation Fund are made - are predicted to blow out from about $3 billion a year to about $6 billion a year for the next five years.

Another indicator of the health of the Government's books also showed red ink for the first time in more than a decade.

Treasury said operating balances after bookkeeping adjustments were predicted to fall into deficit for the first time since 1994 reaching $3.2 billion by 2012/2013.

As a result of the deficits, the Government's financial assets would be run down and Government debt would increase from under 20 percent of GDP to about 25 percent by 2012.

Finance Minister Michael Cullen said his paying down of debt and investments in infrastructure over the last nine years meant New Zealand was better off than most to weather the international credit crisis.

Dr Cullen said the scale of international problems was unprecedented.

"What we thought we knew even five months ago has been overtaken by events," Dr Cullen said.

"The rainy day has now arrived."

He had been assured that both the New Zealand and Australian banking sectors were fundamentally sound.

He noted for the first time since he became finance minister that he was having to explain why the books looked worse than predicted.

Despite that, Dr Cullen said now was the not time for "a slash and burn response" to government spending, or more tax cuts.

He said the Government was maintaining a steady as she goes, prudent approach.

Dr Cullen signalled an incoming government would have to look at forecast increases in spending such as the large boost signalled to the Foreign Affairs Ministry.

The tough times meant there would have to be review of such "low priority" spending to fund more productive new initiatives.

Dr Cullen said he had been told that both New Zealand and Australia's banking systems were sound and would emerge in better shape than many others around the world.

He was not too concerned at the increase in debt to 25 percent of GDP and believed it could be trimmed back towards his 20 percent target in the medium term.

National's finance spokesman Bill English said the state of the books was an indictment on Dr Cullen's handling of the economy.

"New Zealand can no longer afford Michael Cullen and Labour's big-spending low-growth policies," Mr English said.

"The figures outlined in the Prefu are a bit worse than we expected, and we are currently digesting them. However, National is not content to run a decade of deficits.

"But slamming the brakes on at this point would make things worse. The way out is to control the growth of Government spending and grow the economy. That will require a fresh approach."

National is announcing its tax cuts policy on Wednesday.

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