What will the Budget show?

Brian Fallow writes:

The economic forecasts underpinning Thursday’s Budget will need to differ substantially from those the Treasury offered in its half-year update six months ago.

The economy began this year with a lot more momentum than it (or other forecasters) expected. Gross domestic product growth in the December quarter was three times what the Treasury had forecast. But then the drought hit.

The exchange rate is a lot higher than expected, and inflation accordingly lower. Except for house price inflation: house prices are already higher than the Treasury expected them to be in four years’ time.

Unemployment is already down to the levels expected two years from now.

Which is good. However the latest HLFS came out after the Budget forecasts were finalised.

And the estimated cost of rebuilding Christchurch has climbed by a third to $40 billion.

All of these factors will affect the forecast track for revenue, in one direction or the other, and some will affect spending as well.

In March the Treasury estimated the drought would reduce real GDP this year by 0.7 per cent from what it would otherwise have been.

Hence I expect the projected surplus for 2014/15 to remain very slim.