Budget 2011: Record budget blow-out

A record budget blow-out of $16.7 billion has been revealed in the budget today.

But the return to surplus is expected a year earlier than forecast, with the country's account's expected to be back in the black by 2015.

Budget 2011 reveals the deficit, tipped to be $16 billion, has ballooned to $16.7 billion, but forecasts that this will almost halve to $9.7 billion next year and fall away to $500 million by 2015.

By then, net crown debt will reach $72.9 billion (29.6% of GDP), up from $41.5 billion this year (20.8% of GDP), with borrowings forecast to grow to by $13.4 billion next year.

Despite talk of the "zero budget" - with no new spending - the government has found $4 billion to spend over the next four years, with the lion's share allocated to health and education.

At the same time, savings of $5.2 billion have been earmarked from existing public spending over five years, drawn from changes to KiwiSaver, Working for Families and student loans.

For example, about $600 million a year will also be saved by plans to halve tax credits on KiwiSaver.

The public sector will bear the brunt of the fiscal belt-tightening, with efficiency savings expected of most government agencies.

The government has confirmed its plan to sell partial stakes in four state-owned energy companies and reduce its majority shareholding in AIr New Zealand. This is expected to free up between $5-7 billion and pay for about one-third of the government's investment in new core social assets over the next few years.

Government contributions to the New Zealand Superannuation Fund have been flagged to resume in 2016-2017, two years earlier than expected.

Prime Minister John Key said the budget was a "responsible and balanced" one for the times.

Return to surplus
Government is now forecasting a return to surplus by 2014-2015 - a year earlier than planned, with growing surpluses in future years.

The return to surplus will be supported by growth forecast to reach 4% next year, and more than 170,000 new jobs to be created over the next four years.

"This is a significant achievement," Finance Minister Bill English said. "It means that, despite the impact of the February earthquake and the slower economic recovery, the public finances are now in a stronger position than they were in December 2010."

Not a "zero budget"
Budget 2011 allows for new operating spending of about $4 billion over the next four years. Health and education will receive three-quarters of that money.

Capital spending is targeted at broadband, rail and schools, alongside investment in the highway network and the national electricity grid.

Budget 2011 redirects $5.2 billion of existing spending to priority public services and reducing deficits - forecast to achieve savings of $1.2 billion in operating spending out to 2014-2015.

Net crown debt will stand at $41.5 million this year (20.8% of GDP), with borrowings forecast to grow to $54.9 million (26.2% of GDP) next year and reach $72.9 million (29.6% of GDP) by 2015, with the long-term objective of keeping net debt to no more than 20% of GDP by the early 2020s.

As the deficit reduced, Mr English said the need to raise debt would diminish significantly.

"Next year, net average weekly borrowing will fall by two-thirds to about $100 million and by 2014-2015 we will return to surplus and start repaying debt."

A high priority in this year's budget was to save New Zealand from a credit rating downgrade by international credit ratings agencies.

New Zealand is already on negative outlook by ratings agencies Standard and Poor's and Fitch and Moody's warned New Zealand would avoid a downgrade only if the budget was sufficiently austere.  

Canterbury earthquakes
The government has created a $5.5 billion Canterbury Earthquake Recovery Fund for infrastructure and schools, temporary housing, trades trainng, welfare and business support and CBD demolition costs.

An earthquake Kiwi Bond has also been created to generate funds to help meet the government's share of rebuilding Christchurch.

The new four-year bond is similar to a term deposit and will pay interest based on wholesale government bond rates, with the initial interest rate set at 4%.