No further fiscal stimulus necessary from Govt says Treasury
16th Dec 08, 8:16am
Treasury believes that at this stage no further economic stimulus is necessary from Government, as New Zealand's current financial stimulus package, including pending tax cuts, is one of the largest by any developed country. In a speech on the global financial crisis, Treasury Secretary John Whitehead said the New Zealand economy will face a tough few years as it contends with the fallout of the global crisis, with the aging population and risks associated with the dairy boom putting added fiscal pressure on Government. Whitehead said that further stimulus would be provided by the easing of monetary policy. The Reserve Bank is expected to cut the Official Cash Rate from 5% now to 4% or lower by mid 2009. "While we will need to monitor closely the economy's reaction over the next year to policy easing, our judgement at this stage is that easing fiscal policy further than planned by the government is not warranted," Whitehead said. "Monetary policy easing will provide further stimulus, and there is still some scope left for further easing if necessary. As a number of commentators have noted recently, we also need to be mindful that further fiscal stimulus will lead to larger operating deficits, which would increase funding pressure in an environment where it is likely to be difficult to raise funds," he said. "(I)n New Zealand, the volume of credit extended to support the dairy land boom has been highlighted as a risk by the Reserve Bank," he said. "We also recognise that the fiscal pressures associated with an aging population are drawing ever closer every year and will need, at some point, to begin to adjust to the worsening debt position and re-establish the prudent levels of debt that help act a shock-absorber." Last week, the New Zealand Institute published a paper called 'The End of the Golden Weather', also warning about the costs placed on the country by New Zealand's aging population. In a time in which policy needed to focus on putting money aside to cater for future costs incurred by the baby-boomer generation, this will have to be delayed whilst contending with the current crisis. "The next five years had been considered the golden opportunity for economies to get government spending under control and thus limit the impact of rising age-related costs on their economies," the paper said. Whitehead also stressed that the putting up of trade barriers must be avoided, saying that in order to get through the financial crisis, a multilateral global trade system was needed with the conclusion of the Doha round of trade talks. "Internationally, preserving an open international trading system is critical for New Zealand and for other countries," Whitehead said. "Growing world trade, and deepening New Zealand's international connections, are vital foundations for improving our living standards. Putting up protective barriers was one of the huge policy mistakes of the 1930s. We must not let that happen again. The crisis heightens the need for an effective rules-based multilateral trading system, and strengthens the case for redoubled efforts to conclude the WTO Doha Round," he said. Whitehead concluded that he was one of the few who were positive about the prospects for New Zealand, partly because of the budget surpluses run over the last few years. "We are in the fortunate position of having run budget surpluses for a number of years, which meant we entered the crisis with one of the lowest levels of public debt of any OECD country," Whitehead said. "Our low government debt levels provide us the flexibility to take actions that other countries would find far more difficult. And the impact of changes in asset and credit prices should help with structural imbalances in the economy over time. Managing the immediate challenges, without losing sight of the longer-term imperatives, will make possible the sort of prosperous society we all aspire to - and requires creative and courageous responses from us all - firms, households, public servants, and governments."