Key concedes new budget forecasts could be a 'small' deficit

Prime Minister John Key has intimated for the first time that the Treasury's half-year fiscal and economic update on Dec. 16 could change the forecast of a budget surplus to a small deficit, although he is optimistic that by the June 30 year-end a surplus will still be posted.

"Even if it was to show a small negative number, it doesn't mean that's what the number will be when the surplus, or deficit if that was to be the case, is finally determined for the 14/15 year," Key told his post-Cabinet press conference.

His comments follow last week's warning from Finance Minister Bill English that achieving the forecast surplus of $297 million in the update published before the Sept. 20 general election, itself a reduction from the $372 million surplus forecast in the budget in May, would be "a challenge."

"Historically, when you look at the HYEFU, there's been a lot of very wild fluctuations that have taken place," said Key. "We've had times when the HYEFU number has been billions of dollars out from the actual surplus or deficit at the end of the year. We think the numbers are looking OK."

Commenting on China's central bank cutting its official cash rate over the weekend to stimulate growth, Key said the Chinese president, Xi Xingping, remained "very confident of their growth rates" when they discussed the slowing Chinese economy during last week's three day state visit to New Zealand.

China was still targeting a doubling in average economic output per head of population within the next seven years, from around US$7,000 today to around US$14,000 by 2021.

"They need to grow at 6.5% per year and they think that's achievable on their modelling," Key said. While there was a slowdown occurring, it was more in the lending markets than among consumers, with Chinese government policy focusing on "not just the topline GDP (economic output) number, but quite focused on quality of living, quality of the environment, the rural-urban split and GDP per capita growth."

"He (President Xi) is very confident they are going to buy New Zealand products in a very prolific way."

Key was also confident that New Zealand free trade agreement with China would "over time" be "modernised" to the same standard as will apply in Australia's newly minted FTA, which includes less onerous caps on exports of dairy products to China than New Zealand's deal, the first to be signed by China with a developed economy, in 2008.

"Six years is a long time in FTA land," said Key. "It's quite a technical issue how most favoured nation status works in those FTA's. Now, I don't claim to understand exactly why this would or would not be covered, but I know that it's not covered because we need to go and deal with it."