Stimulus package to inject $7 billion into NZ economy

The government's December stimulus package will inject about $7 billion into the economy over two years, Finance Minister Bill English said today.

A raft of countries have now announced measures to sort out financial institutions ravaged by the international credit crunch, as well as economic stimulus packages to deal with the fallout into the real economy.

The UK government yesterday announced a £20 billion ($NZ57.41 billion) package, or spending increases of more than 1% of gross domestic product funded mainly through borrowing.

US President-elect Barack Obama is also promising a package to create millions of jobs, while the current administration continues to pour hundreds of billions of dollars into bailing out its generally foundering financial sector.

Mr English said each country had to make judgments about its own circumstances and how best to deal with them.

The essential difference between New Zealand and countries such as the US was the "extreme volatility" in their financial systems.

"They have to deal with that in the best way they can, whereas our financial sector has been relatively stable and our focus has been more on the real economy," Mr English said.

While the international rescue packages looked huge in comparison to the one that would be offered in New Zealand, Mr English argued that proportionately they were comparable.

On the campaign trail, National outlined introducing tax cuts in April on top of the October tranche, bringing forward infrastructure spending and helping those hit by redundancies.

"The package we are working is a similar kind of stimulus package. Over two years there will be a fiscal impulse of 4 percent of GDP which is comparable to other countries."

With GDP of about $179 billion that equates about to $7 billion.

New Zealand's high interest rates also meant that the Reserve Bank had more room to cut rates than other central banks with lower rates, and this would help stimulate household spending as mortgage rates come down.

Many economists think the world and New Zealand economy could be in recession for a year or more, but Mr English said he did not accept the assertion that the incoming Government appeared to lack the sense of urgency that was being shown by other administrations.

He argued that the first and most important step had been putting in place the government guarantee of retail and wholesale deposits.

The advice from officials was that the retail guarantee was working as desired, but it was still early days for the wholesale banking guarantee.

"This seems much less dramatic than the measures needed to be taken elsewhere. What matters is whether it is effective and it seems to be."

National had also pledged to further tax cuts and announced other measures during the campaign.

"Our plan was ahead of many other countries... but the political drama in New Zealand recently has been about a change of government, not the economy."

Mr English said the government would be putting a heavy emphasis on the economy and expected the public to start paying more attention to it.

"A 4% fiscal impulse emphasis shows we are taking it seriously, now that I stress is a Treasury estimate, but it is still significant."

Details of how the package would be presented and whether it coincided with Treasury's update of the economic and fiscal forecasts were still to be decided, but it would not be a mini-budget.

Parliament resumes on December 8 and the package is expected to be announced within a fortnight of that taking place.

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4 Comments & Questions

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I cannot believe such a packjage can be announced without qualification and reference as to exactly how it was derived.

Given such an answer in an examination the grade would be D

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Anonymous, it was an announcement of intent, not the full treatie. The package will no doubt be fully enunciated, especially for the benefit of those more able to understand.

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The first is always a cynic. As they say 'What you don't see won't necessarily kill you". Could it mean that there is a lot more thought & planning to go into it and any judgement would be premature

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