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New Zealand: 2011 budget includes record deficit

May 19, 2011

On 19 May, the government presented the budget plan for fiscal year 2011 (ending June 2012). According to the document, the government anticipates the core operating deficit ? which excludes investment gains and losses ? will reach a record 8.4% of GDP in the current fiscal year 2010 (ending June 2011). This projection is mainly the result of the one-off costs caused by the 6.3-maginitude earthquake that hit the city of Christchurch on February this year, which followed a 7.0-magnitude tremor in the same area in September last year. The estimate is down from the deficit of 5.5% of GDP projected in the Half Year Economic and Fiscal Update announced in December of 2010. Moreover, owing to government plans to save NZD 5.2 billion through spending cuts between the fiscal years 2011 and 2014 as well as to reforms of the KiwiSaver retirement savings plan and Working for Families program, the fiscal deficit is expected to shrink to 4.7% of GDP in fiscal year 2011. A further shrinkage to 1.8% of GDP is expected in the fiscal year 2012, which will set the country on course for a surplus by the year ending June 2015, which is a year earlier than private sector analysts had expected. In addition, the sale of part of the government's stake in assets in four state-owned energy companies, as well as in Air New Zealand is anticipated to yield revenue of between NZD 5 billion to NZD 7 billion The government estimates that the total cost of rebuilding Christchurch will reach NZD 15 billion (USD 12 billion), with the government footing NZD 8.8 billion (USD 7 billion) of the bill by 2015. The budget shows that despite the impact of the Christchurch earthquakes and the subdued economic recovery, public finances are in a stronger position compared to the estimates projected in December last year. Furthermore, credit rating agency Standard & Poor's, which revised New Zealand's outlook from stable to negative with a sovereign rating of AA+ in November last year, stated that the country's credit rating is secured. The rating agency confirmed that the budget does not affect its negative outlook, and that it will be important for the government to meet its fiscal targets in order to avoid any potential downgrade.

Author:, Senior Economist

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