13 Dec 2010

Lacklustre economy expected to curb growth forecasts

5:47 am on 13 December 2010

A lacklustre economy is expected to curb growth forecasts, widen the Government's operating deficit and result in more borrowing.

The Treasury's December Economic and Fiscal Update is due on Tuesday, as is the 2011 Budget policy statement, which will set out the Government's broad priorities for next year's Budget.

In May's Budget, the Treasury forecast the economy to expand 3.2% in the year to March 2011 and roughly 3% in the following two years.

But restrained consumer spending and a weak housing market has put the brakes on economic activity so far, and most economists expect growth will struggle to make it to 2%.

Radio New Zealand's business editor says the tepid recovery has curbed tax revenue, particularly for companies, while the Canterbury earthquake has resulted in an unanticipated bill of at least $1.5 billion for now.

That will widen the budget deficit, which economists expect will top $11 billion in the June 2011 year, which in turn will require more borrowing.

Finance Minister Bill English has pledged to keep a tight rein on spending.

But Europe's debt problems and a warning from Standard & Poors that New Zealand's credit rating is under threat, will put more pressure on the Government to credibly show how it intends to achieve its goal of returning to surplus by 2016.

Separately, the Budget police statement is expected to reinforce the Government's desire to lift exports and savings, as well as its plans to manage its investments, including Crown-owned entities.