N.Z. Sees Wider Budget Deficit as Recession Deepens

By Tracy Withers

Dec. 18 (Bloomberg) -- The New Zealand government’s budget deficit will be wider than it previously forecast as the economy’s longest recession in 18 years erodes tax revenue and increases welfare payments.

The cash deficit will be NZ$6.63 billion ($3.6 billion) in the year ending June 30, 2009, up from NZ$5.9 billion predicted in October, the government said in its economic and fiscal update released in Wellington today. The shortfall will increase to NZ$11.38 billion by the 2013 fiscal year.

Prime Minister John Key, who won power in a Nov. 8 election, will cut income taxes in April to kick-start consumer spending and steer the economy out of a recession that began in the first quarter of 2008. New Zealand’s Treasury said today there’s a risk the economy will not begin expanding until 2010 as exports of milk, timber and wool subside and unemployment climbs.

“The fiscal position is deteriorating but it’s not that bad relative to what we’re seeing around the world,” said Stephen Toplis, head of research at Bank of New Zealand Ltd. in Wellington. “At least the fiscal stimulus is going toward boosting activity rather than into a black hole to bail out banks.”

The U.S. posted a record $401.6 billion deficit for the first two months of fiscal 2009, which began Oct. 1, as the government purchased stakes in banks. Britain’s 37 billion-pound shortfall ($57 billion) in the first seven months of the fiscal year starting April was the largest since records began in 1993.

Government Stimulus

Stimulus from tax cuts will total about NZ$9 billion, or 5 percent of gross domestic product, over 2009 and 2010, Finance Minister Bill English said. The government is bringing forward capital-spending plans and will increase its allowance for new projects in next year’s budget to NZ$1.45 billion from NZ$900 million.

“We can’t roll back this recession but we can cushion people from the worst effects of it,” English said in Wellington. “We are determined to put more money into the economy.”

New Zealand’s dollar traded at 59.29 U.S. cents at 3 p.m. in Wellington from 59.24 cents before the budget update was released. The three-year government bond yield was unchanged at 4.57 percent. The NZX 50 index fell 0.1 percent to 2,693.07.

The economy will probably grow 0.3 percent in the year ending March 31 and 0.8 percent in the 12 months through March 2010, the government forecasts. Were the global economy to slow more sharply than expected, New Zealand’s economy would contract in both years and the fiscal deficits would be wider, the Treasury said in its so-called downside scenario.

Worst Case

“The economy will probably look more like the Treasury’s low-case scenario,” BNZ’s Toplis said. “Treasury has been trapped by the rapid movement in global economic conditions. All the risks to their growth, inflation and fiscal profiles are to the downside.”

New Zealand’s fiscal 2009 deficit is equivalent to 3.7 percent of GDP and the first shortfall since 2000. The surplus was NZ$2.06 billion in the year to June 30.

To fund the deficit, the government will boost its bond sales to NZ$4.5 billion in fiscal 2009 from the NZ$4 billion announced in October. The government estimates the bond-sales program will rise to NZ$7.5 billion in the year ending June 2010.

Central Bank Governor Alan Bollard has cut interest rates 3.25 percentage points since July to try and revive an economy that contracted in each of the first two quarters of 2008.

“Despite the supportive nature of fiscal policy, the Reserve Bank has considerably more work to do in 2009,” said Su-Lin Ong, a senior economist at RBC Capital Markets in Sydney. The cash rate will be cut to 3.5 percent by the second quarter, with further reductions likely, she said.

Rising Unemployment

The jobless rate will increase to 4.7 percent by March and 6.5 percent by mid-2010, the government forecast. Unemployment rose to a five-year high of 4.2 percent last quarter.

Air New Zealand Ltd., the nation’s largest airline, plans to fire 200 workers, half of whom are long-haul cabin crew. Griffin’s Foods Ltd., New Zealand’s biggest maker of cookies, this week closed a plant in Wellington at a cost of 228 jobs.

Tax revenue will be about NZ$2.5 billion a year lower over the next three years, according to the Treasury forecasts. The government’s gross debt will rise to 33.1 percent of GDP by 2013 from 19.2 percent in the current year.

“The forecasts and projections of debt are outside the range that the government considers prudent,” English said. “The government will have to take action to bring debt levels back under control.”

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.