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'Rainy day' Budget likely

Debt repayment is set to be a high priority when Budget 2016 is released on Thursday as the Government tries to build up its "rainy day'' coffers.

The Government has set a target of lowering net debt to 20% of gross domestic product and it is likely to take more active steps to achieve this on Thursday.

The December fiscal update noted net debt was projected at 20% of GDP in 2020.

ANZ chief economist Cameron Bagrie said he was not convinced debt repayment should have such an overarching priority now.

Fiscal buffers were important but there were other facets to consider.

"We'd like to see the fiscal stance less restrictive to take pressure off monetary policy and also, more capital investment, particularly with low interest rates making it an attractive time to do it.''

Admittedly, the latter would not be an easy task when capacity bottlenecks were already apparent in the likes of the construction sector, he said.

Mr Bagrie expected "respectability'' to be the key takeaway from the Budget.

Economic projections would paint a "reasonable picture'' and the fiscal numbers would continue to show gradual improvement.

The operating balance excluding gains and losses (obegal) had been running ahead of forecast, largely due to stronger-than-expected tax revenue.

The impact of low inflation and weak commodity prices had been more than offset by better activity growth.

The positive tax revenue surprise had been relatively broad-based - another positive signal on the economy.

Finance Minister Bill English had already stated pressures associated with stronger population growth meant some new spending was being brought forward, Mr Bagrie said.

Health and education were likely to get the lion's share of extra funding while previously flagged cuts for 2017 had been dropped, at least for now.

"We do wonder whether some parts of the Budget are purposely being talked down. We wouldn't completely rule out seeing a few goodies.''

The policy agenda would again be of the "small tweaks'' variety rather than lurching significantly in a new direction.

Just as in Budget 2015, social policy initiatives would probably take up the majority of any new spending, although the overarching theme from a spending point of view would be the push for "value for money'' rather than just more money, Mr Bagrie said.

Westpac senior economist Michael Gordon also has a "rainy day'' view of the Budget, with Mr English having the opportunity to put Crown finances in a more robust position for the future.

The Government appeared to have an optimistic view on the economy that underpinned its fiscal forecasts.

In the December update, the Treasury was forecasting real GDP growth to reach a peak of 3.6% by June 2018, a view that evidently had not changed.

"We have a less positive view on economic growth over the full five-year forecast period.''

Previously, the allowances for new operating spending were set at $1 billion for this year and $2.5 billion for next year.

Some of that spending would be brought forward into this year's Budget and another portion of next year's allowance would be diverted towards debt repayment instead, Mr Gordon said.

The policy spending announced to date had not been particularly large, the most expensive being a $303 million plan to modernise the fire services and $187 million for streamlining tax for small businesses.

"Given the increase in the spending allowance for this year's Budget, this suggests there's plenty of scope for more initiatives to be announced on the day.''

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