Key says Treasury advised Govt that new spending over NZ$1 bln would put extra pressure on RBNZ to raise mortgage rates

By Bernard Hickey

Prime Minister John Key has revealed the Government asked for a special analysis from the Treasury of how much extra it could spend in the May 15 budget without putting extra upward pressure on interest rates.

Key said Treasury had advised the Government's new discretionary spending could not be much more than NZ$1 billion a year without forcing the Reserve Bank to do extra work with interest rates to slow the economy.

Key was commenting after his weekly cabinet meeting, where Budget 2014 was discussed. He said the Government saw a "wafer thin" surplus in 2014/15 and only modest but growing surpluses in the years after that.

"The bottom line is there are surpluses and they grow, but they're not massive surpluses and even when they do get more significant, the main point we're making is two-fold: There's a responsibility to either pay down debt or build up the EQC fund, or do some other things with that," he said.

"Secondly, yes there's room to spend a little bit more or maybe give a little bit back, but it's at the margin. The third point is we tested that with Treasury in terms of what they think that amount of money is that we could effectively stimulate the economy without running counter-productive to the actions of the Reserve Bank Governor. The answer is it's a bit more than a billion, but not a lot more," he said.

"That'll be true for any political party. If they tell you it's not true, they're trying to tell you something they want you to be believe, rather than what the reality is. If they tell you they're going to do big things, you've got to ask what it's going to do to your mortgage?

Asked if the Goverrnment had asked Treasury for specific advice on the interest rate impacts of extra spending, he nodded and said: "At what point we're running in a counter-productive fashion to the Reserve Bank's tightening cycle."

Key reiterated the cabinet had no plans for an election year spend-up, given the potential interest rate impacts and the need to fund new capital spending and debt reduction from surpluses.

"Interest rates follow a cycle depending on how the economy is going. The Government's fiscal decisions can't affect the general direction of that cycle, but they can certainly affect the timing and the magnitude of the cycle," Key said.

"As the Reserve Bank itself has said, if the Government increases its net spending, all other things being equal, monetary policy will need to be tighter for a time. That's just a fact, but how you choose to respond is a choice. We've made the choice to keep interest rates lower for longer and at the moment that means being modest with new spending initiatives."

Key said the Government had found it didn't need to throw lots of money at things to fix them.