English Says N.Z. May Abandon Tax Cuts Amid Recession

By Tracy Withers

April 22 (Bloomberg) -- New Zealand’s economy is still in recession, leaving the government with a widening budget deficit that may force it to abandon promised income-tax cuts, Finance Minister Bill English said.

“We’re now in what we expect to be our sixth quarter of recession,” English said in a speech today in Auckland. “The government believes lower taxes will benefit the economy, but we must consider whether they can be afforded in the economic and fiscal environment.”

English is preparing to deliver a budget on May 28 as the economy struggles to recover from its worst recession in more than three decades. The government, which won power in November pledging three years of tax cuts, may have to delay the plan after only the first installment of the promised reductions became effective on April 1.

The decision on future tax cuts will be announced in the budget, English said today.

“The government’s books are undoubtedly in worse shape than Treasury predicted in the December downside forecasts, with ongoing budget deficits and an expected doubling in gross debt over the next three years,” he said. “Our revenue will remain under severe pressure until the economy recovers.”

Without policy changes, debt would be 45 percent of gross domestic product by 2013 compared with 39 percent forecast in the December forecasts, English said.

Budget Deficit

New Zealand’s budget cash deficit was NZ$6.61 billion ($3.8 billion) in the eight months ended Feb. 28, or NZ$1.71 billion wider than forecast, the Treasury said on April 3. Tax receipts were NZ$1.86 billion less than forecast.

The government estimates the economy will permanently lose about NZ$50 billion of output over the three years to 2012, English said. “That is NZ$50 billion that cannot be taxed,” he said.

The budget will outline how the government will curb its own spending in low priority areas while ensuring welfare and pension entitlements are maintained, he said. The rate of new spending will be less than in recent years.

“I’ve set out a clear message of restraint to both ministers and to public-sector chief executives,” English said. “We will need to put a much sharper focus on improving the quality of our spending.”

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