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New Zealand cancell tax cuts in recession budget

Posted on: May 31, 2009


AFP – Friday, May 29

WELLINGTON (AFP) – – The New Zealand government Thursday cancelled promised tax cuts over the next two years in a recession budget aimed at preventing debt from spiralling out of control.

Prime Minister John Key promised the tax cuts in 2010 and 2011 before last year’s election, won by his centre-right National Party after nine years out of power.

But Finance Minister Bill English told parliament that the global recession brought on by the financial crisis had transformed New Zealand’s prospects.

“The world has moved very quickly from the best of times to the worst of times,” he said.

“Ten years of economic growth and expansive appetites for debt and government spending have ended.”

The government will also suspend annual payments which this year totalled two billion dollars into a fund to help pay for universal pensions for the country’s baby boomers, and these are not forecast to resume until 2020.

Key said the budget tried to balance helping New Zealanders through the recession while preventing debt from blowing out.

“The budget puts in place policies that will help ensure that the New Zealand economy emerges strongly from the current recession and provides a platform for strong growth, higher incomes and quality public services,” he said.

Unlike some other developed economies, his government has opted not to pour vast amounts of money into trying to stimulate the economy in reaction to the global recession.

English said the government would maintain spending to cushion the impact of the recession but new spending has been cut to 1.45 billion dollars in the coming year compared with an average 2.8 billion dollars over the last five years.

New Zealand has been in recession since the beginning of last year and gross domestic product is estimated to have shrunk by 0.9 percent in the recently ended year to March.

The economy is expected to shrink by a further 1.7 percent in the year to March 2010 and then start recovering with a 1.8 percent expansion in the following year, according to government estimates.

Unemployment is currently at 5.0 percent and is forecast to peak at eight percent in late 2010.

The government’s operating deficit before losses and gains on investments in the year to June 2009 amounted to 2.92 billion dollars, compared to a forecast of a 1.32 billion dollar surplus at the last budget.

This deficit is expected to blow out to 7.74 billion dollars in the year to June 2010 and the government expects deficits to persist for nine years in all.

Government gross debt will peak at around 38 per cent of GDP by 2016-17, up from an estimated 24.8 percent at the end of June this year, English said.

But fears that the government’s worsening finances could lead to a ratings downgrade, adding around 1.5 percent to interest rates, were allayed by the ratings agencies.

Standard and Poor’s put New Zealand’s AA-plus rating on negative outlook in January but on Thursday changed the outlook to stable.

“The change in the outlook on the foreign currency rating reflects our view that the measures announced in today’s budget will support stabilisation in the government’s fiscal position over the medium term,” S&P credit analyst Kyran Curry said.

Another ratings agency, Moody’s Investors Service maintained its stable outlook on New Zealand’s Aaa sovereign rating.

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