New Zealand must show restraint as the economy hits a new
gear in the next few years, the Treasury chief economist Girol
Karacoaglu warned yesterday.
In a statement to Parliament's Finance and Expenditure select
committee, Dr Karacoaglu said the temptation might be to
spend more as the Crown's day-to-day finances improved as the
economy picked up.
With the economy operating at or above capacity over the next
year or so, too great an increase in government spending
risked driving interest rates up higher than they would
naturally rise at this point in the cycle.
''In turn, this will put more upward pressure on the exchange
rate and undermine the very export-oriented sectors we want
to support for higher living standards over the long term.
''Instead, the Treasury's view is that we need to stay
restrained in our spending.''
In particular, Dr Karacoaglu warned of the need to manage
tightly the Crown's investments in the Christchurch rebuild
to avoid log jams, cost escalations and extra spending.
Public sector efficiencies needed pursuing and government
spending could be tightened if household spending was higher
''We can keep steadily reducing debt over time - having room
to move on the Crown's balance sheet was crucial to New
Zealand's ability to support demand in the economy during the
downturn. It also meant we could deal with the costs of a
large earthquake. We need to rebuild the buffer against
There was an opportunity to pursue lasting gains as the
economy improved by lifting productivity, he said.
In that context, the Treasury welcomed the recent public
discussions around how to improve educational outcomes.
Other priority areas for the Treasury included. -
• Strengthening international market connections so New
Zealand businesses had better access to emerging markets.
• Encouraging companies to invest in productivity
improvements. There were some signs of a lift in productivity
in the construction that could make a real difference to how
the economic cycle was managed, if they could be sustained.
• Pursuing productivity gains in the public sector.
Dr Karacoaglu's statement was bound to find favour with
Finance Minister Bill English but would have grated with
Labour leader David Cunliffe and Green Party co-leader Russel
Norman, who were advocating greater spending in the areas of
Labour's ''baby bonus'' and the Greens' education policy
announced at the weekend.
Mr English will deliver Budget 2014 on May 15. The Budget
remaining focused on delivering policies supporting a more
competitive and faster-growing economy, more jobs, higher
incomes and opportunities for New Zealand families, he said.
''New Zealand is certainly well placed compared to most
countries. On average, wages are increasing faster than
inflation, there are more than 53,000 more people employed
now than a year ago and the unemployment rate is dropping as
the economy gains steam.''
The Government remained on track to surplus next year, he
But there is still some way go go. In his statement to
Parliament on Tuesday, Prime Minister John Key said the
Government was still borrowing a net $78 million a week and,
in dollar terms, debt was expected to peak at $64.5 billion
New York-based ratings agency Moody's Investors Service said
New Zealand's economy and government finances were on an
improving trend but warned the country's creditworthiness
faced ''various challenges''.
''Economic growth is accelerating, partly due to earthquake
reconstruction, with real GDP expected to increase by 3% in
2014, while the government budget is forecast to be in a
balanced position in the 2014-15 fiscal year and in surplus
thereafter,'' Moody's said in a statement.
Moody's rated the Government's creditworthiness at a ''very
solid'' Aaa with a stable outlook.
New Zealand's current scenario meant the ratio of government
debt to GDP would peak below the median for Aaa-rated
governments and stabilise thereafter.
''Moody's further notes that the Government aims for a
significantly lower debt level by the end of the decade.''
At a glance
• 2014 released on May 15
• The Treasury expresses caution about increased
• Moody's Investors Service maintains Aaa rating
• Net debt to peak at $64.5 billion in 2015-16