Current account gap no threat to economic stability - Mahklouf

Treasury secretary Gabriel Makhlouf

New Zealand's deteriorating balance of payments will not threaten the country's economic stability and is not unsustainable, Treasury secretary Gabriel Makhlouf says.

Treasury expects the country's current account deficit will rise to $16.6 billion, or 6.5 percent of gross domestic product, by 2017 from $9.1 billion, or 4.4 percent of GDP, in 2012 and is being exaggerated by insurance flows stemming from the Canterbury rebuild and is not ringing alarm bells, Mr Makhlouf told Parliament's finance and expenditure committee.

The balance of payments measures total goods and services which cross the nation's borders, showing how reliant the country is on foreign funding.

"The underlying current account deficit is tracking at similar levels relative to GDP to that of the recent past," he said. "We do not believe that the size of the current account deficit represents a threat to New Zealand's economic stability or that the economy is on an unsustainable economic trajectory."

Government figures in March showed the annual deficit at $10.5 billion for the 2012 calendar year, or 5 percent of GDP.

Mr Mahklouf said the current environment, where heating property prices threaten to stoke household confidence to take on debt and ramp up consumption, differs from the last housing bubble in the mid-2000s, as national savings have improved and people have greater knowledge of the situation.

"What we're forecasting over the next four years does not mean that the longer term path is unsustainable."

Last of three

Mr Mahklouf appeared at the last of three select committee hearings to touch on the balance of payments, which Green Party co-leader Russel Norman has jumped on in recent months, claiming it shows the government's plan to rebalance the economy has failed.

Finance Minister Bill English told the committee he was optimistic the current account deficit will improve in the next five to seven years, as exporters who have weathered a strong currency show better profitability as they become more competitive.

He accepted warnings by rating agencies that current account was a vulnerability, but said the market was more upbeat about New Zealand's prospects.

Rating agencies "keep arguing about the vulnerability, but the market keeps pushing up our exchange rate and dropping our government stock rate, which doesn't tell me the market thinks it's a high risk. We know it's some risk."

Economic Development Minister Steven Joyce told the committee a current account deficit is not a bad thing if foreign investment creates local jobs and growth.

"The challenge is actually to build investment in this country," he said. "For $100 million invested in an industry or company in New Zealand that's what I would argue is a good thing from the current account perspective - $100 million for consumer activity is probably not as sustainable."

Mr Joyce said the economic rebalancing has been obscured by the global financial crisis and Canterbury earthquakes, and that improvements will likely show up in the medium term.

(BusinessDesk)

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Not a threat to economic stability - i.e., the status quo of a country slowly slipping into low-wage status as the profits flow back to their overseas owners and an increasingly narrow elite banks easy rent on capital.

(As in the past two decades, GDP has kept growing but real incomes have stagnated for the vast majority, sucking us into a low-wage low-skill cycle.)

"The Mexico of the South Pacific" and "tenants in our own land" are hyperbole slogans, but they make a valid point.

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