By Praveen Menon
WELLINGTON, May 18 (Reuters) - New Zealand will likely unveil a smaller deficit and a more optimistic economic outlook when it releases its budget this week, and is expected to target its spending on tackling issues of rising homelessness and inequality.
While generous monetary and fiscal support helped New Zealand's $200 billion economy in its fight against COVID-19, the stimulus also fuelled a housing crisis and worsened long-standing issues.
In a pre-budget speech this week, Finance Minister Grant Robertson said the better-than-expected economic recovery will help the government keep a lid on the country's high debt, while also giving it room to make investments in areas such as climate change, child wellbeing and housing.
Analysts expect the government to unveil on Thursday a narrower budget deficit than the NZ$21.57 billion ($15.63 billion) forecasted in December. They expect the budget deficit to shrink further in coming years, so that the operating balance nears zero by 2025.
Net debt, which was forecasted at 52.6% of gross domestic product (GDP) in December, is seen falling to the late 40s by 2024.
"These kinds of numbers so soon after the pandemic will be the envy of many nations," said Westpac economist Nathan Penny.
The government, however, will target spending on recovery in housing, education, healthcare and other sectors hit by the pandemic.
While New Zealand's economy contracted in the final quarter of last year, an unexpected fall in the unemployment rate in the March quarter and a recent improvement in business confidence have pointed to an economic rebound.
Rising inequality inflamed by the housing crisis is arguably the biggest political challenge facing Ardern's centre-left government in its second term in office.
The 40-year-old's popularity soared with her response to the pandemic, which has kept nationwide cases to barely 2,500 and helped secure her Labour Party's emphatic election win last year. But opinion polls since show her support slipping.
The budget is a chance for Ardern to take the crisis of poverty and inequality seriously, Bryce Edwards, political analyst in residence at Victoria University of Wellington said in an opinion piece this week.
"They can do this by delivering something serious or even transformational for those suffering at the bottom of the heap in New Zealand," Edwards said, adding that increasing core benefit rates would be the most effective way.
But spending will be curtailed by the almost NZ$120 billion increase in projected net debt, ANZ said in a note.
"While that amount of debt accumulation represents a lot of saved jobs and livelihoods, it also represents a need to remain focused on fiscal consolidation...," said ANZ Senior Economist Miles Workman.
($1 = 1.3803 New Zealand dollars)
(Editing by Ana Nicolaci da Costa)
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