Finance Minister Bill English yesterday announced the impact of the Canterbury earthquake, funding leaky homes and a slower than expected economic recovery would push the Government's operating deficit, before gains and losses, to $11.1 billion or 5.5% of gross domestic product in the year to March 2011.
The Budget Policy Statement and Half Year Economic and Fiscal Update released yesterday shows a deteriorating picture from the May forecasts, with the operating deficit increased from an $8.6 billion deficit, or 4.2% of GDP.
The forecasts show the deficit improving to $6 billion in 2012 and a $39 million profit reported in 2015.
Mr English issued a warning that next year's budget would be "restrained", with new discretionary spending confined to a $1.12 billion annual cap, capital allowances capped at $1.39 billion and the reprioritising of $2 billion of spending to higher value areas.
Mr O'Reilly said the economy would benefit by allowing "mum and dad investors" to buy shares in crown-owned assets, increasing the entitlement age of superannuation, reducing the cost of KiwiSaver and changing interest-free student loans.
The half-year update showed the cash deficit had also blown out from $9 billion a year ago to $15.6 billion this year, higher than May's forecast of $13.3 billion.
Treasury has forecast the cash deficit to improve to $9.7 billion next year, $8.1 billion in 2013 and $6.1 billion in 2014.
Net debt as a percentage of GDP is forecast to peak at 28.5% in 2015, double the 14.1% in 2010.
Mr English said people were paying down debt and spending less, which meant economic growth was more sluggish than was the case after previous recessions.
The economy retracted 0.4% in the year to March 2010, but was expected to grow at 2.2% for the current year and 3.4% in 2012, then 2.9% and 2.7% in subsequent years. helped by the rebuilding of Canterbury.
Mr English said the path back to budget surplus would continue in next year's budget, by improving savings and controlling spending increases.
Initially, the target was to keep debt below 40% of GDP and return it to below 20% by early next decade.
ASB economist Jane Turner said while the deteriorating accounts for the current year were not a surprise, the expected speed at which the accounts would improve were.
That improvement came from the reining in of expense growth which, by 2014, she said would more than offset the impact of reduced revenue forecasts.
A revised government bond tender programme of $47.5 billion through to 2015 reflected deteriorating cash deficits, but she described as "a dark cloud" the $3 billion to $3.5 billion more a year of debt the market would have to absorb.
"Nevertheless, our take is that the long-term fiscal forecasts hint at a swifter return to fiscal health is possible than what the 2010 budget forecasts indicated.
"That, along with the likelihood the 2011 budget will find more ways to squeeze the lemon, should keep the sovereign credit rating intact for now."
ANZ head of market economics Khoon Goh said there were few surprises in the data, and he was pleased to see the Government focus on better management of its balance sheet.
"For too long, there has been an excessive focus on spending as opposed to management of the crown balance sheet, with net worth of the crown accounting for 50% of GDP. The Investment Statement adds an additional layer of fiscal accountability."
Council of Trade Unions economist Bill Rosenberg said no new spending in next year's budget risked further economic stagnation and higher unemployment.
Labour associate finance spokesman David Parker said the Government had only itself to blame for the deteriorating accounts given its "mismanagement of the economy".
