$7.8 billion deficit forecast for next year

A big cut to Working for Families income limits will help slash the fiscal deficit to approximately $7.8 billion in 2011/12 and pave the way for a return to surplus in 2014/15, one year earlier than forecast in last year’s Budget.

That’s the combined view of the thousands of traders this week on New Zealand’s online prediction market, iPredict Ltd, owned by Victoria University of Wellington.

Today's budget is expected to announce a deficit of about $16 billion.

The chief executive of iPredict, Matt Burgess, said there had been very heavy trading on iPredict’s Budget 2011 stocks earlier in the week although volumes fell yesterday probably as a result of a consensus view being formed.

“Anyone can open an iPredict account and start trading and we believe those with an insight into New Zealand’s economy and political decision-making processes have been among those who have taken advantage to trade on our Budget stocks,” he said.

Mr Burgess said big cuts to Working for Families income limits were forecast, with iPredict using the income limit for parental tax credits for a family with four children as an indicator stock.

“This year, the income limit for parental tax credits for a family with four children is over $166,000 but iPredict traders are saying they believe it will be slashed to around $112,000 next year,” he said.

“Partly as a result of that, traders expect the fiscal deficit to fall from the 8% of GDP talked about for 2011/12 to 3.9% of GDP in 2011/12 – or around $7.8 billion, assuming a $200 billion economy.

“A 2011/12 deficit of 3.9% of GDP would be much worse than the 2.5% of GDP deficit forecast for that year in last year’s Budget, although many would see it in the context of the Christchurch earthquakes and the South Canterbury Finance and AMI bailouts.

“One improvement from last year’s Budget forecasts is that iPredict traders now expect the Government’s accounts to return to surplus in 2014/15 compared with last year’s Budget which forecast no return to surplus until 2015/16.

“It will be interesting later today to see how close iPredict’s forecasts are to the forecasts to be announced by Finance Minister Bill English,” he said.
iPredict uses Total Crown Operating Deficit Before Gains and Losses as its indicator of the fiscal deficit.