Conservative financial management and a strongly growing economy had delivered a fiscal surplus this financial year, even after allowing for increased related expenditure.
The forecast financial surpluses were predicted to increase over the next five years and net Crown debt to fall to below 20% of gross domestic product (GDP), she said in an investment strategy report.
Growth in New Zealand was being supported by an increasing number of people arriving to live, work, study and visit. Combined with low interest rates, population growth was also helping consumer spending, housing construction, other building and investment more widely.
The forces driving growth had been stronger than anticipated in earlier official forecasts and combined with recent increases in dairy export prices, should underpin forecast annual average real growth of 3.6% in the current year ending June 2017 and 3.5% the following year, Ms Howe said.
Further out, as labour markets were expected to improve in Australia and other economies, net migration flows were expected to subside from current levels and growth would be less rapid. Slower labour force growth was expected to exert upward pressure on wages and prices, resulting in higher interest rates from mid to late 2018.
``The recovery in global dairy prices over the second half of 2016 is expected to lead to a higher terms of trade in the near term.''
In the medium term, ongoing moderation in global milk production should help underpin dairy prices overall. Weak global inflation and a relatively strong New Zealand dollar was supporting the terms of trade, she said.
While uncertainty remained over the timing and extent of the financial magnitude, the overall impact of the Kaikoura earthquakes on New Zealand's financial position was expected to be minor.
Preliminary estimates suggested direct fiscal costs of the earthquakes could be $2billion to $3billion. Some of that cost was expected to be funded by insurance proceeds or existing resources.
The financial impact for the current financial year assumed an incremental net cost of $1billion, but still left a financial surplus for the 2017 financial year, Ms Howe said.
Some industries would be more affected by the earthquakes than others. The most likely in the region would be tourism - retail, hospitality and leisure - and primary production of seafood and dairy. Short-term disruption was expected in those industries, due to key infrastructure being damaged, and access to the region had also been disrupted.
The extensive damage to the road and rail network in the northeast of the South Island would have an impact on freight and the transport of people between much of the South Island and the North Island. That was expected to add costs to freight and to travel through the region.
Over time, the negative impacts of the earthquakes on economic activity should be offset by repair and reconstruction activity, although it might be at the expense of other work in the construction industry or capacity constraints leading to higher costs - wages and/or materials, Ms Howe said.
Trading partner activity should remain steady on average over the medium term. A stronger US economy might drag global activity higher, although that might be offset by the more protectionist approach to global trade currently sweeping the world, an ongoing slow down in China's economy and the impact of Brexit on the United Kingdom's trade with Europe.
The Australian economy was expected to continue improving as it moved from mining investment to other sources of demand. Higher commodity prices would result in upside risk to Australia's growth prospects.
Ms Howe said the level of residential investment would continue to underpin New Zealand's growth outlook for some time. Net migration was expected to remain strong for the next year and monetary policy was expected to remain accommodative through to at least 2018. Supply constraints in the construction sector remained elevated and were expected to remain so over the medium term, especially in Auckland.
While house price growth should moderate in Auckland, given its already high level and the impact of credit restrictions on investors and foreign-domiciled buyers, price growth should remain solid in the regions outside Auckland.
As global interest rates rose, the New Zealand dollar should ease, she said. A lower dollar would support New Zealand primary industries and services exports, such as tourism and education.
``The key risk to this upbeat outlook would be interest rates moving higher than expected and sooner ... This will have a negative impact on the household sector in New Zealand where debt levels remain at historic highs,'' Ms Howe said.
