nz slams into recession

New Zealand's government said its budget deficit will be almost twice as large as earlier forecast amid the economy's first recession in 10 years and a deepening global financial crisis.

The cash deficit will be $NZ5.9 billion ($5.04 billion) in the year ending June 30, 2009, more than the NZ$3.48 billion shortfall predicted in May, the government said in its pre- election economic and fiscal update released today. The shortfall will widen to $NZ7.3 billion ($6.2 billion) by the 2013 fiscal year.

Swelling budget deficits mean whoever forms government after a November 8 general election will have little scope for extra tax cuts or spending unless it further raises debt and cuts public services, Finance Minister Michael Cullen said. The ruling Labour Party, trailing opposition National Party in opinion polls, is seeking a fourth term in office next month.

''This is a time of unprecedented challenge for the global economy,'' Cullen told reporters. ''The effects of the turmoil on the economy, peoples' level of confidence and security has been profound. The rainy day has come.''

The government, led by Prime Minister Helen Clark, announced in May income-tax cuts worth NZ$10.6 billion over four years.

National Party leader John Key, whose voter popularity is at record highs, will release his economic and tax plans later this week. Key's party has previously said it plans to lower income taxes again on April 1.

''Now is not the time for risky or reckless promises of any additional tax bonuses over and above what is already legislated for by parliament,'' Cullen said.

Stocks Decline

The New Zealand dollar traded at 65.44 US cents in afternoon trade from 65.51 cents before the report was released. The 10-year government bond yield rose 4 basis points to 5.73%. The benchmark NZX 50 Index of shares declined 2.8% to 3062.65, taking this year's loss to almost 25%.

The government's gross debt will rise to 23.1% of gross domestic product by 2013 from 17.4% in the current fiscal year, according to today's figures.

The economy will grow just 0.1% in the year ending March 31, down from a May prediction of 1.5% expansion, the government estimated. The economy advanced 3.2% in the year through March 2008.

The government's economic forecasts were completed August 28, before the most recent bout of global turmoil.

''There are risks around these numbers as we cannot predict how the most recent bout of turbulence will impact'' the real economy here and abroad, Cullen said.

Tax Revenue

Tax revenue will be NZ$900 million a year lower over the next three years as the economic slowdown crimps spending and profits, the government said today.

New Zealanders are buying fewer televisions, furnishings, and home appliances as they pay higher interest costs on their mortgages and credit cards amid the global debt squeeze.

Australia's Transfield Services and Fairfax Media are cutting workers in New Zealand. ANZ Bank, New Zealand's largest lender, is tightening up on overtime, freezing recruitment and reducing the use of casual workers, according to a workers union.

Warehouse Group, the nation's biggest discount retailer, reported a 52% plunge in profit in the six months ended July 27. Briscoe Group, an Auckland-based sports goods and home-ware retailer, said in August that first-half profit dropped 70% as spending slowed.

Reserve Bank Governor Alan Bollard cut interest rates in July and September to try and revive an economy that contracted in each of the first two quarters of 2008.

Bond Sales

To help fund the increased budget deficit, the government will boost the size of the fiscal 2009 bond-sales program to $NZ4 billion from the $NZ3.4 billion forecast in May.

The budget cash surplus was $NZ2.1 billion in the year ended June 30 compared with a $NZ908 million surplus forecast in the May budget. The cash deficit is after payments to a fund that the government is building to pay for future pensions, as well as planned capital spending and loans to students.

Over four years ending June 30, 2012, the deficit will accumulate to $NZ24.6 billion compared with $NZ13.8 billion forecast in the May budget.

The economy will advance 1.8% in the year through March 2010 and 3.3% the following year, the government forecast.

New Zealand's home-building approvals slumped to a 22-year low in August, consumer confidence dropped to the weakest in 17 years in the second quarter and the jobless rate rose to the highest in more than years at the end of June.

The economy shrank 0.2% in the second quarter after contracting 0.3 percent in the first three months of the year, putting New Zealand in its first recession since 1998. The economy probably also declined in the third quarter, the Reserve Bank of New Zealand said last month.

Bloomberg