The pre-election fiscal update from the Treasury just reminds you how quickly Government budget surpluses can dissolve into large deficits when the economy turns down and the mandarins and their polly masters in Wellington don't see it coming. Their forecasts for the economy this year are a larger U-turn than the RBNZ's about-face in June. Economic policy options for the incoming government will be severely constrained by the finances. Wellington is about to feel the cold wind that the rest of the country has been feeling for almost a year now.
The total lack of leadership from the current Government on this economic and financial crisis we find ourselves in is a rather sad commentary on the quality of politicians we have in NZ. The reality is that the Clark/Cullen Government has no idea of what to do, or say. Fiscal policy is now totally limited, so Alan Bollard can take some comfort that excessive Government spending will reduce as an adverse impact on inflation over coming years. Perversely, I see no increases in 10-year Government bond interest rates over coming months as a result of the massive increases in supply onto the market to fund $6 billion annual cash shortfalls. The weight of investment money seeking a safe home will keep the rates well below 6.00%. ------------------ *Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com