News Analysis: New Zealand gov't budget expected to reflect changed fortunes

When New Zealand Finance Minister Bill English delivers his seventh annual Budget Thursday, the most significant cut might well be to his confidence in foreseeing the year ahead.

The government has already been laying the ground for breaking its biggest promise -- a return to an operating surplus this financial year.

After six budgets and six deficits, English and Prime Minister John Key had staked their economic management credentials on returning the accounts to the black.

Recently they've been forced to spin the seventh anticipated deficit as a result of economic success: the economy is still growing, but with inflation at near zero, tax takes are lower than expected.

English can rightly claim credit for a tight rein on government spending -- the estimated 73 billion NZ dollars (53.77 billion U.S. dollars) this year is about 4 billion NZ dollars (2.94 billion U.S. dollars) lower than 2011 forecasts.

But he might shy away from the optimism he showed when delivering the 2014 budget and promising a surplus of 372 million NZ dollars (274.27 million U.S. dollars) this year, rising to 1.3 billion NZ dollars (958.49 million U.S. dollars) next year.

"The government has moved from managing our way out of recession to managing a growing economy," said English last year.

"Looking ahead," he added, "there are huge opportunities for New Zealand as countries in the Asia-Pacific region develop rapidly and demand more of what we produce."

Since then, weakening demand from China and a global market surplus of dairy products have crashed prices for New Zealand's biggest export commodity to their lowest values in six years.

The growing housing crisis in Auckland -- New Zealand's biggest city and home to a quarter of the population -- has also forced the government to change its thinking.

Last year, the government had attributed the city's soaring house prices to a lack of supply and it tinkered with measures to free up land and lower building materials costs.

However, the Reserve Bank has since sounded a warning of a risk to the country's financial stability and called on the government to curb investor demand through tax measures.

Despite ruling out tax measures last month, Key announced on Sunday that the budget would include a tax on capital gains from investment residences sold within two years of purchase.

The government has also backed away from tax cuts raised last year and it has been talking down promises to focus on child poverty made after its success in the general election in September last year.

Fresh from winning an increased mandate for a third term, Key said he would ask officials for new ideas to fight child poverty, which is estimated to affect about a quarter of a million children.

Social assistance providers have been a constant reminder of those promises in the run-up to the budget.

"We look to government to launch the economic plan that comprehensively addresses housing supply and affordability, child poverty, social and economic deprivation in regional New Zealand," Salvation Army official Sue Hay said in a statement Wednesday.

There are signs the country is growing restless with the government's constant talk of its economic success and that many are failing to see the benefits of the annual 3-percent growth rate.

In a by-election in March, the government lost a previously safe parliamentary seat to an opponent who hammered the message that New Zealand's predominantly rural regions were being ignored despite producing much of the country's wealth.

Popular campaigns have also forced the government to reconsider employment laws for low-paid workers.

So what will be in the budget?

The government has drip-fed announcements in recent months, but fiscal constraint remains the order of the day.

"Modest" seems to be the adjective commonly applied to already released details on funding increases for areas such as education and innovation.

And after raising expectations last year, English is likely to keep his forecasts modest too. Endi