WELLINGTON, New Zealand (AP) -- New Zealand’s economy is facing slow growth and rising debt levels as it battles a return to budget deficits after eight years of surplus amid international financial turmoil, the government and treasury said on Monday.

The fresh forecasts come as the center-left Labor government lags nearly 20 percentage points behind in opinion polls less than five weeks from the Nov. 8 general election.
Finance Minister Michael Cullen put a brave face on the Treasury’s “Economic and Fiscal Update,” saying if New Zealand “keeps its nerve, we will pull through this global upheaval in better shape than most other economies.”
After years “of prudence” by the Labor-led government that saw it stack up record budget surpluses and cut the country’s debt levels, “we will not have to slash and burn” government programs in response to the current international crisis, he told reporters.
The banking systems in New Zealand and Australia are “very sound indeed” with the two nations’ central banks working closely together to ensure stability, Cullen said.
New Zealand’s Treasury and Reserve Bank are considering whether New Zealand should “adopt some form of deposit insurance scheme to give guarantees to bank deposit holders,” he said.
“That’s something ... we want to work through carefully over time in a longer term context -- not as some kind of rushed response at this particular moment,” he added.
He said with the U.S. Congress having passed its $700 billion rescue package “the new Congress will be wanting to look at the regulatory mechanisms surrounding its financial sector because (without it), the next cycle will be even worse as institutions draw the lesson that ... their behavior is largely risk-free.”
In a shot at the main opposition National Party, which is pledging higher tax cuts, Cullen said the next few years were not the time “for reckless extra tax cuts.”
Monday’s new figures showed the budget slipping into deficit in the current year as the slowed economy, in negative growth since January, delivers lower tax income and higher welfare costs to the government.
Cullen said the immediate effects would be higher government debt levels and budget deficits that could persist for the next nine years, but cautioned there was no need for a “knee-jerk” cutback in social service levels or infrastructure investment.
A first round of personal tax cuts came into effect from Oct. 1 -- the first by the government, but Cullen said further cuts due in 2010 and 2011 would go ahead as planned to help stimulate the economy.
The Treasury forecast predicts gross domestic product growth of just 0.1 percent in the current year, ending next March 31, then rising to 3.4 percent within three years.
Unemployment at 4.4 percent in the year ending next March is expected to peak at 5.1 percent before falling back to 4.8 percent by the end of March 2012, with the current inflation level of 5 percent falling to 2.5 percent by 2012.
The forecasts, required under New Zealand law ahead of a general election, show that the budget dips into deficit this financial year for the first time since 1999 and it is not expected to return to surplus till 2017.
Government debt, currently at 17.4 percent of gross domestic product, will rise to 30 percent of GDP by 2018, the figures showed, adding some 500 million New Zealand dollars ($327 million) a year to government’s debt servicing costs.