The Treasury's latest forecasts show ongoing improvement in the Government's financial accounts and Finance Minister Bill English has again dangled the prospect of tax cuts in 2017 in front of voters.
The Budget Policy Statement, released yesterday, showed the economy continuing to expand, although it hit an unexpected soft patch in the first half of this year when global concerns and falling dairy prices knocked business and consumer confidence.
Looking ahead, real gross domestic product (GDP) growth was expected to be weaker over the next two years than was forecast in the Budget Update, although stronger in 2018 and 2019.
The Treasury was forecasting solid economic growth over the next five years, averaging 2.7% a year.
Mr English said the positive outlook for the economy over the next few years was driven by the Canterbury rebuild, supportive monetary policy, construction in Auckland, export growth supported by a lower dollar and migration.
Next year would be the last year Government set aside money for the Canterbury rebuild.
Unemployment was expected to drop to 4.5% after peaking at 6.5% in March next year.
By mid-2020, 195,000 jobs were expected to be created and the average wage was forecast to increase by $6000 to $63,500.
The updated priorities did not mean a change in direction for the Government, he said.
"We will continue to focus on keeping a tight rein on spending, running surpluses and paying down debt.''
The BPS confirmed the operating allowance remaining at $1billion for Budget 2016, $2.5billion for Budget 2017 - an election year - and $1.5billion in Budget 2018, Mr English said.
Net debt was expected to be 21.9% of GDP in 2020-21, after peaking at 27.7% in 2016-17.
Westpac senior economist Michael Gordon said since the May Budget, a weaker outlook for economic growth over the next couple of years had led to a sharp downgrade in the Treasury's revenue projections for the next few years.
The operating balance was expected to slip back into a small deficit in the current financial year, despite revenue coming in ahead of forecast in the first four months of the year.
Despite the lower revenue, the Government had left its operational spending allowances for the next few years, with income tax cuts still pencilled in for Budget 2017, he said.
"Even after today's downgrade, our impression is the economic forecasts underpinning the Treasury's revenue projections may still be on the optimistic side.''
Westpac expected GDP growth to slow, not accelerate, in 2018-19 as the Christchurch rebuild passed its peak.
Inflation was expected to remain soft in the near term, which would further weigh on nominal income growth and the tax take, Mr Gordon said.
Labour finance spokesman Grant Robertson said Prime Minister John Key and Mr English had delivered a jobless "recovery'' that had come and gone with unemployment expected to keep rising over the next two years.
Several years after the Government declared the recession was over, National had delivered the weakest economic recovery on record with unemployment never dropping below 5.6% and wages remaining stagnant.
Unemployment staying above 6% meant tens of thousands more Kiwis out of work, he said.
The BPS showed wage growth would fail to match inflation for the next two years.
"All of this is the result of a government without a plan other than to drift along and hope for the best. New Zealanders deserve better than that.''
Now the surplus sideshow was over, it was time for National to put people first in the management of the economy, Mr Robertson said.
No-one could declare the economy a success when the Children's Commissioner said one-third of children lived in poverty.
Poverty eradication must become a core economic and social goal of the Government.
The Government had pushed out the target for paying down debt by another year and contributions to the New Zealand Superannuation Fund would not restart until 2022-23.
"This kind of irresponsible short-termism will be the legacy of the National Government,'' he said.
The priorities
• Maintain rising operating surpluses over the forecast period so cash surpluses are generated and net government debt begins to reduce in dollar terms.
• Reducing net government debt to 20% of GDP in 2020.
• Implement a new funding policy for ACC, following previous levy reductions.
• If economic and fiscal conditions allow, begin reducing income taxes from Budget 2017.
• Using any further fiscal headroom - including from positive revenue surprises - to reduce debt faster.
