May 25, 2017 / 6:48 AM / 3 years ago

New Zealand expects to spend bigger 2017 surplus on infrastructure

WELLINGTON (Reuters) - New Zealand expects to post a bigger-than-forecast budget surplus in 2017 and plans to invest the extra cash in infrastructure to fuel the growing economy, Finance Minister Steven Joyce said on Thursday.

New Zealand Finance Minister Steven Joyce announces the government's budget for 2017 during a function in Wellington, New Zealand, May 25, 2017. REUTERS/Lincoln Feast

The government predicted a NZ$1.62 billion ($1.14 billion)surplus in the year to June versus its prior forecast for a NZ$473 million surplus in the December half-year economic and fiscal update.

“These surpluses are significant, but they will be needed to meet the cost of the very large new capital investment the Government has committed to,” said Joyce while presenting the annual budget.

Joyce announced NZ$11 billion in spending on infrastructure including road, rail, prisons and housing over the next four years. The budget also included a NZ$6.5 billion package to increase family incomes by adjusting tax thresholds and increasing grants as the government tries to woo voters ahead of national elections this year.

“Success breeds success,” said Cameron Bagrie, chief economist at ANZ. “They’ve worked really hard over the past five years to turn deficits into surpluses and when you’ve got money in the bank it gives you options.”

The better-than-expected result was helped by strong corporate taxes and because some government spending on reconstruction after November’s earthquake has yet to take place.

The New Zealand dollar NZD=D4 was largely unmoved after the budget was released.

The government forecast a NZ$2.85 billion surplus in the year to June 2018, versus a prior forecast of a NZ$3.34 billion surplus.

A recovery from last year’s sharp drop in global prices for New Zealand’s main export earner, dairy, and booming tourism has led to unemployment hovering around eight-year lows of 4.8 percent and GDP growth at 2.7 percent.

The Treasury lifted its forecast economic growth to 3.7 percent in the year to June 2018 from 3.4 percent, and 3.5 percent in the following year from the 2.6 percent previously forecast.

Economists questioned whether New Zealand’s growth would be that strong, given capacity constraints, particularly in the construction sector.

Despite a strong economy that remains the envy of developed country peers, fast-rising housing costs have pressured the government to do more for first-time buyers who have been priced out of the market.

Economists said raising tax thresholds was an acknowledgement that not everyone was benefiting from the fast-growing economy.

“The focus of policy initiatives was very much on assisting low-income earners and low-income families,” said ASB Bank economists, in a research note.

Record immigration, which has fueled rises in housing prices, is also putting a strain on infrastructure. The government previously announced a plan to build 34,000 new homes over the next decade.

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The ruling National party is touting its careful management of New Zealand’s NZ$250 billion economy ahead of elections on Sept. 23 as it fights for a fourth term against the center-left Labour party.

Joyce also said the government would lift the homeowners’ earthquake levy to replenish the country’s national disaster fund, which has been wiped out by deadly earthquakes centered in Christchurch in 2011 and Kaikoura in 2016.

The budget forecasts show net debt at 23.2 percent of GDP in the year to June 2017 and the government aims to bring it down to 10 to 15 percent by the year to June 2025.

Additional reporting by Ana Nicolaci da Costa; Editing by Lincoln Feast and Jacqueline Wong

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