Caution against spending

Girol Karacoaglu
Girol Karacoaglu
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 than expected.

''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 future crises.''

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 said.

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 in 2015-16.

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 spending
• Moody's Investors Service maintains Aaa rating
• Net debt to peak at $64.5 billion in 2015-16


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