New Zealand Sees Wider Deficits as Economy Contracts

By Gemma Daley and Victoria Batchelor

Oct. 6 (Bloomberg) -- New Zealand's government said its budget deficit will be almost twice as large as earlier forecast amid the economy's first recession in 10 years and a deepening global financial crisis.

The cash deficit will be NZ$5.9 billion ($3.9 billion) in the year ending June 30, 2009, more than the NZ$3.48 billion shortfall predicted in May, the government said in its pre- election economic and fiscal update released today. The shortfall will widen to NZ$7.3 billion by the 2013 fiscal year.

``This is a time of unprecedented challenge for the global economy,'' Finance Minister Michael Cullen said in Wellington. ``The effects of the turmoil on the economy, peoples' confidence and security has been profound. The rainy day has now arrived.''

Prime Minister Helen Clark's ruling Labour Party is trailing opposition National Party in opinion polls as New Zealand heads to a Nov. 8 general election. Cullen said today further tax cuts or extra spending would ``reckless'' as the government forecast its debt will surge 67 percent by 2013.

``The government has had to take a reality check,'' said Craig Ebert, senior markets economist at Bank of New Zealand Ltd. in Wellington. ``If this is the rainy day, we have a long winter ahead of us. The risks are that the outcomes will disappoint further.''

Popular Opposition

National Party leader John Key, whose popularity among voters is at record highs, will release his economic and tax plans later this week. Key's party has previously said it plans to lower income taxes again on April 1.

The government announced in its May budget income-tax cuts worth NZ$10.6 billion over four years.

``Now is not the time for risky or reckless promises of any additional tax bonuses over and above what is already legislated for by parliament,'' Cullen said.

New Zealand's dollar dropped to 65.39 U.S. cents at 3:46 p.m. in Wellington from 65.51 cents before the report was released. The 10-year bond yield rose 4 basis points to 5.73 percent. The NZX 50 Index of shares slumped 3.2 percent to 3,049.56, taking this year's loss to almost 25 percent.

The 2009 cash deficit is equivalent to 3.2 percent of gross domestic product.

Tax revenue will be NZ$900 million a year lower over the next three years as the economic slowdown crimps consumer spending and corporate profits, the government said today.

To help fund the increased budget deficit, the government will boost the size of the fiscal 2009 bond-sales program to NZ$4 billion from the NZ$3.4 billion forecast in May.

Swelling Debt

The government's gross debt will rise to NZ$53.67 billion, or 24.3 percent of GDP, by 2013 from NZ$32.1 billion, or 17.4 percent of GDP, in the current year, today's report showed.

The economy will grow just 0.1 percent in the year ending March 31, less than a May prediction of 1.5 percent expansion, the government estimated. The economy advanced 3.2 percent in the year through March 2008.

The government's economic forecasts were completed Aug. 28, before the most recent bout of global turmoil.

``There are risks around these numbers as we cannot predict how the most recent bout of turbulence will impact'' the real economy here and abroad, Cullen said today.

New Zealanders are buying fewer televisions, furnishings, and home appliances as they pay higher interest costs on their mortgages and credit cards amid the global debt squeeze.

Australia's Fairfax Media Ltd. is cutting workers in New Zealand. ANZ Bank, New Zealand's largest lender, is tightening up on overtime, freezing recruitment and reducing the use of casual workers, according to a workers union.

Economic Slowdown

Warehouse Group Ltd., the nation's biggest discount retailer, reported a 52 percent plunge in profit in the six months ended July 27. Briscoe Group Ltd., an Auckland-based sports goods and home-ware retailer, said in August that first- half profit dropped 70 percent as spending slowed.

Central Bank Governor Alan Bollard cut interest rates in July and September to try and revive an economy that contracted in each of the first two quarters of 2008. The economy probably also declined in the third quarter, the Reserve Bank of New Zealand said last month.

The budget cash surplus was NZ$2.1 billion in the year ended June 30 compared with a NZ$908 million surplus forecast in the May budget.

Over five years ending June 30, 2012, the deficit will accumulate to NZ$24.6 billion compared with NZ$13.8 billion forecast in the May budget.

The cash deficit is after payments to a fund that the government is building to pay for future pensions, as well as planned capital spending and loans to students.

To contact the reporters on this story: Gemma Daley in Wellington at gdaley@bloomberg.net; Victoria Batchelor in Wellington at vbatchelor@bloomberg.net.