New Zealand government keeps room for surprises in annual budget

The New Zealand government's annual budget this week is set to be an unpredictable affair as the center-right National Party-led administration finds itself facing an increasingly tight race to a September general election. Last week Finance Minister Bill English, who will deliver his sixth budget on Thursday, said it would remain "focused on responsible fiscal policy and sensible economic policy" so as to pose no risks to the country's economic recovery. However, Treasury figures show tax takes were below forecast for the fifth month in a row last month, raising questions as to how exactly the government aimed to meet its target of returning to an operating surplus in the 2014-2015 fiscal year. While GDP was up 2.7 percent last year, making New Zealand one of the better performing developed economies, unemployment has remained stubbornly rooted at 6 percent, and political opponents have suggested the tax takes indicate the economic growth is failing to translate into higher pay packets and enough new jobs for a growing work force. Another major economic vulnerability for the government is the soaring price of housing in the biggest city of Auckland and the second city of Christchurch, a problem the Reserve Bank of New Zealand (RBNZ) sees as a threat to financial stability. In response, the RBNZ imposed mortgage lending curbs on the banks in October last year, a move that has had some success in slowing price rises. But the RBNZ has also raised interest rates twice this year, with a 25-basis point rise in March and another in April, the first moves since March 2011, bringing the Official Cash Rate to 3 percent and squeezing mortgage holders. Charged with keeping inflation within a 1-percent to 3-percent target range, the RBNZ has warned of more interest rate rises to come as the rebuilding of the earthquake-battered Canterbury region introduces new inflationary pressures and immigration adds to housing demand. The RBNZ has also warned it could intervene to help lower the unsustainably high value of the New Zealand dollar, which is posing a barrier to exporters, and that the country's pillar dairy industry cannot rely on continued high commodity prices or its dominance in export markets. When English outlined his planned return to surplus in his last pre-election budget in May 2011, it included the partial privatization of four state-owned energy companies and the national carrier, Air New Zealand. Despite the deep unpopularity of this policy, the National Party was returned to power, buttressed by three minor support parties in Parliament, in what was widely seen as a vote of confidence in the country's economic stability after the Global Financial Crisis. However, a referendum last year failed to stop the partial privatizations, despite showing overwhelming opposition to the policy, and since then, opposition parties have been highlighting the growth of government debt and the sense that the recovery is failing to filter down to those at the bottom of the economic ladder. On top of that, the National Party has become mired in a series of scandals involving wealthy donors and the perception it is working for the moneyed minority rather than the whole country. The latest political poll last week showed National's public support down 6 percentage points from recent highs that have been nudging 50 percent, putting it in a tight race with the center- left Labour-Green party grouping. In 2011, the government set a limit of 1 billion NZ dollars ( 862.07 billion U.S. dollars) in new spending each year. The largest new spending announcement so far this year has been 100.9 million NZ dollars (86.98 million U.S. dollars) for the New Zealand Defence Force, but with the other smaller health, social and employment initiatives, it is still far short of the new- spending limit. All in all, English still has a lot of room and plenty of motivation to unveil some surprises in this year's budget.