Small surplus, lift in spending

Finance Minister Bill English yesterday confirmed the Government's accounts would move to a wafer-thin surplus next year as he increased further annual Budget allowances to $1.5 billion.

The allowances would then be increased by 2% each Budget.

''These modest increases in spending meet the Government's objective of reducing net debt to 20% of GDP by 2020 and will not materially affect interest rates.''

In Parliament, Mr English said the Treasury advice he received confirmed lifting annual Budget allowances to $1.5 billion a year was near the upper limit before they began to materially affect interest rates.

It was important not to return to the big spending increases of the mid-2000s which, together with a doubling of house prices, forced the Reserve Bank to push up interest rates at a significant cost to households and businesses.

Most economists say the Reserve Bank will increase the official cash rate next month to 3.5% before taking a break until September. A cash rate of 4.5% next year is expected to be the peak.

Budget forecasts showed the operating balance before gains and losses (obegal) would be in surplus by $372 million next year, a sharp improvement on the $18.4 billion deficit in 2010-11 and the $3.9 billion deficit the Government inherited in 2008-09, Mr English said.

Net core Crown debt was forecast to peak on an annual basis at 26.4% of GDP next year and fall thereafter. Longer-term projections showed net debt dropping to 20% of GDP in 2019-20 - meeting the Government's debt objective.

Future surpluses would allow the Government to pay for capital spending and start reducing debt built up during the years of deficits, he said.

The Government would also restart contributions to the New Zealand Superannuation Fund once net debt reduced to 20% of GDP. Westpac senior economist Anne Boniface said the Government's willingness to increase its allowance for new spending, in the absence of significant new sources of funding, was a surprise.

There were limited measures to find savings compared with previous Budgets and revenue forecasts were little changed, despite a stronger set of economic forecasts.

''Instead, the Government is willing to sacrifice larger surpluses in later years - and indeed increase the borrowing programme - in order to fund this new spending.''

From a macroeconomic point of view, the implications of the Budget were limited, she said.

The additional spending would provide a slight boost to GDP growth and increase the pressure for higher rates, although only marginally.

The increase in projected bond issuance over the next few years was unlikely to worry investors and could even be welcomed to the extent it added to bond market liquidity, Ms Boniface said.

Labour Party finance spokesman David Parker said the Budget fudged the numbers and glossed over the real problems Kiwi families had been facing for five years.

National had achieved the surplus through overcharging New Zealanders $120 million for ACC, pretending $375 million in transport spending was an interest-free loan and cutting $567 million out of the Crown's half share of local infrastructure from the Canterbury rebuild, despite the Christchurch City Council saying costs were increasing.

Health spending was going backwards and most New Zealanders did not earn enough, with 46% of Kiwis getting no rise in their pay last year, he said.

''Too many young people are in low-paid and insecure service work. The benefits of growth are not getting through to working New Zealanders. This Budget does not fix that,'' Mr Parker said.

New Zealand First leader and former treasurer Winston Peters said Mr English had done a juggling act to create an artificial surplus at the expense of all New Zealanders but especially Christchurch quake victims.

''What sort of Government holds back money from Christchurch?''Christchurch people knew they were being sacrificed so the Government could boast about its books.

''The facts are clear. The Government has jacked up the numbers from an insurance deal when AMI was taken over. The money was transferred to government bonds. The interest on the bonds is a match for the surplus. So, behold, the books balance,'' he said.



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