The International Monetary Fund (IMF) says the Government should not let the effects of the Christchurch earthquake slow its efforts to get the nation's budget back to a surplus.
However, the task may be harder than the IMF predicts as the Government weighs up options for paying for the rebuilding of Christchurch.
Prime Minister John Key has ruled out an earthquake levy and the Government seems likely to borrow the money for the rebuilding and cut spending in the May Budget.
An IMF mission yesterday completed a routine assessment of the New Zealand economy, and downgraded its 2011 growth projection for the country from 3% to 1%.
The Government said after September's 7.1-magnitude Christchurch quake that it planned to get the budget back to surplus by the 2014-15 financial year.
Finance Minister Bill English said the 6.3-magnitude aftershock on February 22 had caused it to delay the plan by a year to 2015-16.
But the IMF yesterday said the Government should not delay its return to surplus. "We advise returning to fiscal surpluses by 2014-15, if the economic recovery proceeds as expected," it said on its website.
Statistics New Zealand this morning releases the current account figures, which are expected to show a narrowing in the deficit to about 2.4% of GDP, led by an improving trade balance.
At the weekend, Mr Key said the Government would trim the $800 million of new spending it had intended to put in the May Budget.
Yesterday, he said the pain would be shared. The spending cuts would not mean a savage attack on one particular thing. But savings had to be found.
"You either tax New Zealanders more or the Government spends a little bit less because eventually, we've got to pay that debt back," he said.
The IMF said it was both feasible and desirable to stick to the medium-term target, even though the earthquakes had worsened the budget deficit in the short term.
"Fiscal consolidation would create a buffer against future shocks," it said. "It would also relieve pressure on monetary policy and thereby the exchange rate, helping rebalance the economy and contain the current account deficit."
The IMF also warned: "We project the 2010-11 fiscal deficit to reach 9% of GDP, much larger than budgeted."
Initial estimates put the cost of the damage of the original quake and its main aftershock as high as $15 billion, about 7.5% of GDP.
The Government was expected to face direct costs of $10 billion.
But the IMF predicted economic growth would be boosted to 4% next year by earthquake rebuilding, as well as the Rugby World Cup later this year and an increase in trade.
The quake damage occurred at the heart of the Canterbury region, which accounts for about 15% of the national economy. That growth would drop back to an estimated rate of 2.5% in later years, it said.
The nation's economic recovery had stalled since mid 2010 and domestic demand remained soft, as cautious households and businesses slowed their borrowing in a weak housing market, the IMF said.
Damage and disruption from the quakes meant uncertainty surrounded the economic outlook, particularly related to the size and timing of reconstruction.
Domestically, the negative effect on confidence and growth might be larger than expected, and a sharp fall in prices of overvalued houses would hit household balance sheets.
The quakes would boost public spending in the present financial year by $6.5 billion, including $3 billion funded by the Earthquake Commission, and net core Crown debt (excluding assets of the Superannuation Fund and advances) will rise to 22.5% of GDP by June 2011.
