IMF backs government path to surplus as 'ambitious' but not dramatic

The International Monetary Fund is backing the government’s plan to return the budget to surplus by 2014/15 in what it calls an “ambitious” plan, but one that’s not overly “dramatic”.

IMF mission chief to New Zealand Brian Aitken told reporters in Wellington yesterday the global lending agency supports the National-led administration’s plan to get the books back in surplus as an appropriate balance between constraining public debt and protecting the economy.

“I don’t think we would want to see anything dramatic, but I don’t think the government needs to take dramatic action,” Aitken said. “It is a kind of ambitious deficit reduction plan.”

The IMF today released its preliminary concluding statement on New Zealand’s economy after a week-long mission, and Aitken said the “outlook for New Zealand looks good though it’s not great.”

The benefits of the government’s plan lay in withdrawing fiscal stimulus ahead of the earthquake reconstruction and private sector recovery, giving the government room to act in the event of another global shock, limiting pressure on interest rates to rise and helping contain an increase in the nation’s net foreign liabilities, the IMF said.

Prime Minister John Key yesterday said the government is searching for further savings in the public sector amid fears it might miss the surplus target, which are under threat from a weaker tax take and softer economic activity.

The IMF said the major risks to New Zealand’s economy are external ones, particularly how the European debt crisis plays out.

Aitken said the Reserve Bank has scope to cut the official cash rate, currently at 2.5 percent, in response to any major external shocks, and benign inflation expectations means rates won’t have to rise as much as they may have in the past.

That should lead to a lower exchange rate if it follows international experience, which needs to be weaker to bring the nation’s projected current account deficit to a more sustainable level.

The statement said the central bank’s accommodative monetary policy stance is appropriate, and given the high level of mortgages on floating rates, it will be able to remove stimulus quickly when necessary.

Aitken said the Christchurch rebuild probably won’t lead to major inflationary pressures as it will likely be a slowly phased project rather than a rapid explosion of activity. Any rising prices will likely be localised to Canterbury and the construction sectors rather seep throughout the nation.

The Christchurch rebuild is the major uncertainty, but because of New Zealand’s high level of reinsurance, the economic impact wasn’t as bad as it could have been, Aitken said.

Elevated house prices were also cited as a potential risk, though a sudden price correction was unlikely.

Aitken said it was unclear if the recent deleveraging by households was a change in behaviour, or if it was merely a symptom from people ramping up too much debt during the house price boom of the past decade.