New Zealand's fiscal core 'rotting' – NZIER

New Zealand has a "rotting fiscal core" and risks ending up like the USA or Greece in a few years, according to New Zealand Institute of Economic Research chief executive Jean-Pierre de Raad. 

This gloomy message comes as Prime Minister John Key claims that New Zealand is well-placed to deal with a possible second round of the global financial crisis. 

In an editorial in today's Dominion Post, Mr de Raad says New Zealand may look strong but its fiscal core is "rotting" just like in the US and Greece, with "unsustainable" costs associated with an ageing population.

"Our newfound illusion of fiscal restraint must not derail the necessary debate on how we tackle the unsustainable health and superannuation costs of an ageing population, and the need to improve economic performance."

He says the experience in the Northern Hemisphere shows what happens when economics and politics collide.

"This all seems far away from little New Zealand. But our fiscal deficit will balloon in the next 20 years, burdening future generations with debt, so the current generation can have "free" health and superannuation, which successive governments have promised but failed to provide for," Mr de Raad said.

"Health and superannuation costs costs will grow exponentially, unless New Zealand embarks on a credible strategy to stem the flow. Governments will be forced to borrow and push public debt levels to that of the US or Greece."

Mr de Raad says health and superannuation costs costs will grow "exponentially" unless New Zealand embarks on a credible strategy to stem the flow.

"Governments will be forced to borrow and push public debt levels to that of the US or Greece," he said.

"If we wait until the crisis hits in 15 years or so, we will face similarly unpalatable decisions that the US and Europe are facing now."

His warning follows a similarly gloomy message from NZIER chief economist Shamubeel Eaqub, who said on TV3's The Nation programme on Saturday that the latest financial crisis was a reminder the economic recovery would be slow.

"What we saw in the markets was really a panic reaction and we saw a big correction in equity markets and financial markets, but the real economy has just gone from kind of okay to flat. 

"We're not going backwards, it's still not recession, but it's still that realisation you know where things were okay, to something being quite modest, and you know markets will vacillate and they go from great to fair so quickly."

He said New Zealanders were "making progress" on paying down debt and that was part of the reason this country hadn't done as badly as others.