By Praveen Menon
WELLINGTON (Reuters) - New Zealand cut its growth forecast for 2019/2020 and flagged a budget deficit on Wednesday, but announced a significant lift in capital spending to bolster the economy with a plan to invest more than $12 billion on infrastructure projects.
The Treasury department predicted a NZ$0.9 billion ($576.6 million) budget deficit in the current 2019/20 year in its half-year economic and fiscal update, down from the NZ$1.3 billion it had forecast in its May budget.
"A small deficit in the current year is not surprising, given the impacts global headwinds are having on confidence here," Finance Minister Grant Robertson said in a statement, after releasing its half-year economic and fiscal update.
Treasury also trimmed expected surpluses for 2021 and 2022 as economic growth slows amid heightened risks from factors such as the U.S.-China trade war and Brexit uncertainty.
The growth forecast for the current year was cut to 2.3% from the previously forecast 3.2%.
Robertson said that while the economy was expected to grow more slowly, New Zealand was still outperforming its peers.
"The economy continues to grow, it continues to outpace most other economies," he told a news conference.
Robertson also announced the government's plan to spend NZ$12 billion on new infrastructure investment, which he said was the highest level of capital spending in more than 20 years.
That would include NZ$6.8 billion for transport projects, and funds for schools and hospitals, some of which he said were "shovel ready".
Economists had expected the Treasury to cut its ambitious growth forecast, raising questions of whether growth well above 3 percent was realistic given immigration and house price growth were starting to slow.
Westpac Bank said the treasury update was a "damp squib" and would have little impact on forecasts for GDP, inflation or interest rates.
"The highlight was a substantial lift in planned capital spending," said Westpac Senior Economist Dominick Stephens.
"However, this is planned over a period of many years. That is a wise way for the government to run its infrastructure program, but it means the impact on the economy will be smaller than more front-loaded spending might have been," he added.
The New Zealand dollar rose slightly after the announcement.
The government will maintain net debt within a range between 15% to 25% of GDP, the statement said.
TIME TO SPEND
S&P Global said on Wednesday that New Zealand's sovereign credit rating can absorb more fiscal spending even as it delays a return to budget surpluses.
"We expect these factors will further delay the forecast return to general government surplus until fiscal 2024, noting that this was delayed by a year to fiscal 2023 in the 2019-2020 budget released in May."
There have been growing calls for the government to take advantage of low interest rates and spend more to stimulate the economy.
Governor Adrian Orr signaled recently for the government to loosen its purse strings, as the central bank held rates at a record low of 1% at its final policy meeting for the year last month.
The government which came to power in 2017 has been running big surpluses in the last two years.
Robertson said it was a good time to spend, and the government was lifting its capital spending to the highest level in more than 20 years.
"With debt low and borrowing costs at record lows, the conditions are right for the government to invest to future-proof New Zealand," he said.