2015 wafer-thin budget surplus target now within margin of error

(BusinessDesk) - The government is sticking to its 2015 target for getting its books back in black, but only just.

The Treasury is forecasting an operating surplus before gains and losses (obegal) of just $66 million in the 2014/15 financial year, down from the $197 million buffer flagged in the May budget, according to its half-year economic and fiscal update.

The government agency has pared back its expectations on revenue growth in the face of a softer economic recovery. If growth follows the Treasury's downside scenario, the obegal isn't expected to return to surplus until 2017.

"Continued control over spending has allowed the government to remain on track to surplus, despite the impact on revenue of more difficult global conditions," Finance Minister Bill English says in a statement. "This is a time for sensible and responsible policy - not for untried economic experiments."

The government's ambitious plan to return to surplus in the 2014/15 fiscal year hasn't convinced many, with the Reserve Bank, Fitch Ratings and a survey of financial institutions picking the books to stay in deficit for at least another year.

Mr English told a media briefing in Wellington the government will need to consistently produce surpluses of $2 billion to $3 billion if it wants to achieve its debt repayment targets in the future.

The Treasury expects the worst to have passed, with an obegal deficit of $9.2 billion in the 2011/12 year, falling to $7.3 billion and $2 billion in the following two years before turning into surpluses.

Those forecasts rely on the government's revenue stream recovering at a faster pace than the economy on the back of personal earnings as the Canterbury rebuild fosters the labour market, a broadening of the tax take and hikes in fuel excise and road user charges.

Without the changes in transport "we would've fallen short of the surplus track," Mr English says.

Still, those risks are skewed to the downside, with the Treasury giving it a higher than one-third chance of undershooting, and less the one-third of overshooting.

The Treasury says the reduction in tax revenue will be slightly offset by cheaper finance costs with lower inflation forecast for longer, and the Debt Management Office has increased its borrowing programme by $6.5 billion in the coming four years and included a $7 billion programme to pre-fund the 2017 bond maturity.

The DMO will issue $14 billion in bonds in the 2012/13 year, an increase of $500 million from the budget, and sell an unchanged $10 billion the following year. The office added $2 billion to the 2014/15 programme for $10 billion in issuance, and raised its 2015/16 forecast by $4 billion to $ 7 billion.

The Treasury now sees net debt topping out at $75.9 billion in 2016/17, though that's a smaller percentage of gross domestic product than in the previous two years.

Forecasts for economic growth are more downbeat than previous projections, with GDP growth expected to peak at 2.9 percent in 2013/14, before slowing to 2.4 percent by the end of the horizon. That growth will be underpinned by the Canterbury reconstruction and could be undermined if the rebuild is further delayed.

More problems in the major global economies, that have include Europe's sovereign debt crisis and the stalled negotiations to prevent the US from implementing US$600 billion of automatic tax hikes and spending cuts are also seen as a threat to the local recovery.

(BusinessDesk)