NZ govt sees slower growth, lower surpluses

New Zealand Prime Minister Bill English
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New Zealand will post smaller than expected budget surpluses over the coming four years as the economy grows more slowly and the tax take shrinks,Finance Minister Bill English said on Tuesday, triggering a slide in the kiwi dollar.

English said a surplus of NZ$297 million ($251.26 million) was now expected for the year to June 2015 compared with NZ$372 million forecast in the budget delivered in May.

Future surplus forecasts were also reduced by NZ$500 million a year in each of the next four years, while the government net debt level was expected to peak at a slightly higher level this year, with a slower rate of reduction in future years.

The news brought the New Zealand dollar to its lowest level in nearly a week against the U.S. dollar, falling to as low as $0.8440, from around $0.8460.

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The economy was being driven by strong construction, migration, and high terms of trade, English said. However, the momentum has slowed, and growth was expected to be softer as commodity prices ease and higher interest impact on activity.

The updated forecasts were in the pre-election economic and fiscal update (PREFU) required by law before the three yearly general election.

The finance minister said the center-right government would not jeopardize the return to budget surpluses after six years of deficits nor put pressure on interest rates by opening its coffers too wide.

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"There is no room for significant loosening of the purse strings," English told reporters.

"Our first responsibility is to keep the books in surplus and reduce net debt."

The Treasury cut the budget surplus forecast for each year through to 2018 by NZ$500 million, and said it expected the net debt to peak slightly higher this year at 26.8 percent of gross domestic product from the budget's forecast of 26.4 percent.

It also said it would take longer for the government to reduce its net debt level, with the target 20 percent of GDP now seen being reached a year later in 2021 from those in the budget.

The official forecasts for economic growth were trimmed slightly to 3.8 percent for the year to March 2015 from 4 percent in the budget, although later year forecasts were close to the budget figures.

Financial markets were unmoved by the document.

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New Zealand's economy grew 3.8 percent in the year to March, its fastest rate in six years, driven by strong commodity prices, particularly for dairy products, the rebuild of earthquake damaged Christchurch, and improved domestic activity.

However, the Treasury said commodity prices have fallen and the terms of trade were slowing, which would weigh on growth, while the strong impetus from construction was also likely to slow in time.

English said the National Party would maintain a tight control of new spending, sticking with the rise of NZ$1.5 billion next year, and by 2 percent in later years, laid out in the budget, to keep the pressure off interest rates and leave options open for the future.

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The NZ Debt Management Office reaffirmed its budget borrowing program of NZ$8 billion in the year to June 2015, with a new 2035 inflation-indexed bond to be issued through syndication by the end of the year.

The center-right National party has a strong lead in polls ahead of the Sept 20 vote, but under New Zealand's proportional voting system would likely need the continued support of minor parties to command a majority.