By Charlotte Greenfield and Ana Nicolaci da Costa
WELLINGTON (Reuters) - New Zealand's new Labour-led government said it expects a reduced budget surplus next year as increased spending on families and housing is only partly offset by scrapping tax cuts proposed by the previous administration.
The government said on Thursday it would increase social spending aimed at families with children, improve housing supply and re-start government contributions to the country's pension fund, while keeping bond issuance broadly steady in coming years.
The twice-a-year economic and fiscal update was the first for Labour since it took the helm in October, ending nine years of centre-right National Party rule.
It was in keeping with Labour's bid to spread prosperity more broadly, which has also seen it ban some foreigners from buying New Zealand property and undertake a central bank review aimed at adding employment to its inflation-targeting mandate.
Finance Minister Grant Robertson said the government expects to post a budget surplus of NZ$2.54 billion in 2018, down from the NZ$2.86 billion surplus forecast in is pre-election update in August.
The Treasury also predicted slightly lower budget surpluses than forecast under the former National government for the next three years, but expected a pick up in 2021.
"This is a government that is not satisfied with the status quo. This is a government that believes that we do need to do some things differently in order to establish a sustainable and inclusive economy," Robertson said in a Parliamentary speech.
The New Zealand dollar slipped slightly on the news of the lower surplus forecasts for 2018, edging down to $0.7013 from around $0.7023.
Bond yields fell, as the government kept its bond issuance plans largely steady, flattening the yield curve.
"BEST CASE SCENARIO"
The government planned to spend NZ$32.9 billion from its capital spending budget across the next four years, rising from the proposed NZ$26.2 billion in the August update.
The Treasury forecast growth would pick up to 3.3 percent in the year to June 2018 and 3.4 percent in 2019.
Even though that was a downgrade from 3.5 percent in the August update, it was still a lofty increase from 2.5 percent annual growth in the second quarter.
Philip Borkin, senior economist at ANZ bank, said the figures allayed some concerns for a fiscal deterioration under the new government but were also optimistic.
"We are left with the impression that the numbers represent something of a best-case scenario," he added.
Longer term, the Treasury expected government spending would help lift economic growth as more money flowed through the economy, and predicted higher gross domestic product for 2020 and 2021 than seen in August's forecasts.
The Treasury forecasts debt to GDP will fall to 21.7 percent in the year to June 2018 versus 22 percent in the August update. Labour aims to get government debt down to 20 percent of GDP over the next five years.
"If GDP growth doesn't accelerate to the extent that the Treasury is projecting, the risk is that government revenue will fall short, requiring the government to either rein in some of its spending plans, find additional sources of revenue, or abandon its commitment to reducing net debt so rapidly," said Dominick Stephens, chief economist at Westpac.
(Reporting by Charlotte Greenfield and Ana Nicolaci da Costa; Editing by Shri Navaratnam and Eric Meijer)
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