Treasury yesterday released an optimistic set of economic forecasts, which it admitted had a 20% chance of being wrong and that the economy could perform much worse than predicted.
The Pre-Election Fiscal Update (Prefu) is released every three years before an election as an "opening of the books" to show that any new government will not be surprised by hidden economic timebombs.
In the latest Prefu, Treasury has gone to great lengths to highlight not only the optimistic forecasts but also the risks involved, as it is obliged to do.
Real economic growth of 2.3% is forecast for the year ending March 2012 and an average growth rate of 2.9% per year is forecast for the years ended March 2012 to March 2016.
The unemployment rate is forecast to fall from 6.5% in June this year to 4.7% in March 2016.
A return to surplus in the operating balance (before gains and losses) is forecast for the year ending June 2015 and the ratio of net debt to GDP is predicted to peak in the same year.
Finance Minister Bill English highlighted the growth in new jobs over the forecast period along with strong growth in wages and other household income.
Treasury forecasts 150,000 new jobs in the forecast period.
"The economy has now grown in eight of the last nine quarters and growth in the first half of this year has been stronger than Budget 2011 forecasts. This has contributed to the creation of 43,000 new jobs in the past year - 20,000 more than forecast at the time of the Budget," he said.
The Government was on track to move from a forecast deficit of $10.8 billion in the current year to a surplus of $1.5 billion in 2014-15.
Getting back to surplus as soon as possible was one of the most important things the Government could do to lift national savings and rebalance the economy towards the productive sectors, Mr English said.
The forecasts show government cash deficits continuing from 2012 until 2016 and, strangely given how well the investments have performed in the past two years, the net retained surpluses of state-owned enterprises, Crown enterprises and the New Zealand Superannuation Fund are forecast to dip into losses from 2012 into the foreseeable future.
That could mean the Government believes the dividends from SOEs will drop substantially once it sells off 49% of the energy companies and Solid Energy and reduces its stake in Air New Zealand.
It is unlikely world markets will experience sharp and enduring drops, although volatility will continue.
The volatile world economy is seen as the greatest risk to New Zealand achieving forecast economic growth rates and returning to fiscal surplus in 2015.
While Mr English said it was more likely global leaders would manage their way through the current crises, the potential for a "meltdown" could not be discounted.
However, he counted that a low risk, with reasonable growth prospects for a "resilient economy driven by sensible policies".
"We're taking the view that, with the Christchurch rebuild, which has to happen, and a reasonable outlook for our export prices, we've got a reasonable chance of reasonable growth," he said.
The economic outlook showed the Canterbury rebuild would provide a significant boost to output and employment over the next few years, providing a powerful offset to the effects of the weaker world economy.
Because much of the rebuild cost was met by insurance claims, there was a high degree of certainty that the activity would occur, although the precise timing of the rebuilding work was much less clear, Treasury said.
The earthquake rebuild was likely to take longer to begin than initially expected. That was primarily the result of continuing seismic activity in Canterbury and the implications of the activity for the reassessment of land damage and resulting building standards.
So far, earthquake-related building consents remain at a low level. Nationally, the market for new houses is showing signs of a recovery from its trough.
Over the past year, an estimated 12,000 to 13,000 houses were built, which is well below the 20-year average of around 22,000 houses built per year.
"As well as taking longer to begin, the rebuild is expected to be larger and take longer to complete, and we have revised our estimate of the extent and cost of damage up to $20 billion from $15 billion," Treasury said.
Mr English said there was little the Government could do to influence the global economy, so it would concentrate on what it could control, such as export competitiveness.
On the fact interest rates had barely risen since credit-rating downgrades earlier in the month, Mr English said the world economy was going through its "most unusual period since the Second World War", with many of the world's largest economies experiencing or being threatened with downgrades, accompanied by the lowest interest rates in 50 years.
"Those pressures are overwhelming upward pressures," Mr English said. "It's a very confusing picture. All we know is there's been no effect yet on mortgage rates."
Ninety-day bank bills, a usually reliable indicator of bank lending rates, are forecast to fall next year, indicating mortgage rates will be kept low by retail banks. They start to rise in 2013, reaching 5.3% by 2016.
