New Zealand Sticks to Budget Plan, Trims 2015 Surplus Target

Auckland, New Zealand
Geof Wilson | Getty Images
Auckland, New Zealand

New Zealand's government said it would maintain its tough spending controls in 20 years as it downgraded its economic growth outlook on Tuesday, pledging to return the strained budget to a small surplus by 2015.

The government said its tight fiscal management would continue, cutting spending to counter a lower growth outlook which is expected to reduce its tax revenue.

"The forecast of NZ$66 million is not large, but we are heading in the right direction," Finance Minister Bill English told reporters. That compared with NZ$197 million forecast in the May budget.

The Treasury cut its growth for the year to March 2013 to 2.3 percent from 2.6 percent in the May budget and to 2.9 percent in March 2014 from 3.4 percent, as its raised unemployment forecasts.

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The comes despite the expected boost from the earthquake rebuilding in the Christchurch region.This government now expected its net debt to peak at 29.5 percent of GDP in 2014/15, from an earlier forecast of 28.7 percent in 2013/14.

English also said that ongoing strength in the New Zealand dollar, largely due to factors offshore continued to weigh on the economy, was limiting export-driven growth.

"The high kiwi dollar is ... a headwind to our efforts to tilt the economy towards exports and away from debt-funded consumption, and it would be nice to be making more progress on that," he told reporters.

In May, the government said the "zero" budget for the second year would see net new government spending slashed to only NZ$26.5 million over four years from an operating allowance of NZ$800 million a year previously.

Analysts are doubtful the government can meet the forecast, with the economy growing slowly, household and business spending weak and unemployment stubbornly high.

New Zealand relies heavily on offshore lenders to fill its budget gap and has repeatedly reaffirmed its surplus plan to defend its double-A rated credit ratings. Moody's still rates New Zealand triple-A.

(Read More: NZ Central Bank Holds Rates, Wary of Price Pressures)

Foreign investors hold about 60 percent of its bonds and securities, keeping the country vulnerable to external shocks and global uncertainty like the euro zone crisis.

The NZ$200 billion economy is largely driven by agriculture exports such as dairy, beef, wool and timber and about 40 percent of its exports goes to Australia and China.