sign uplog in
Want to go ad-free? Find out how, here.

RBNZ's Bollard says if govt gets structural deficit under control, interest rates could be lower, exchange rate will come down

RBNZ's Bollard says if govt gets structural deficit under control, interest rates could be lower, exchange rate will come down

The Reserve Bank of New Zealand has taken a stab at the government’s underlying deficit, saying much of the deterioration in the government’s fiscal position looks to be structural, and therefore likely to remain even as the effects of the recession fade.

An improvement in New Zealand’s structural deficit would lead to a lower exchange rate, the RBNZ said, saying public sector savings could be made faster than in the private sector, as this would come from an explicit policy choice.

The RBNZ also warned that the underlying structural deficit may be larger than Treasury estimates if part of the improvement in New Zealand’s export prices is not sustained.

The fiscal deficit had deteriorated sharply in recent years, with Budget 2010 forecasts pointing to a core Crown operating deficit, excluding investment gains and losses, of 5.1% of GDP for the 2011 fiscal year, the RBNZ said.

Some of that deterioration had been due to the shift from the economy running beyond capacity through the middle part of the previous decade to one with surplus resources currently, the RBNZ said.

“However, much of the deterioration in the fiscal position appears more structural, and will thus persist even as the effects of the recession fade. The Treasury estimates that the cyclically adjusted fiscal balance is in deficit by 4% of GDP.

“Similarly the OECD estimates that New Zealand has a cyclically-adjusted general government deficit (a measure that captures central and local government, and capital and current spending) of around 3.5% of GDP,” the RBNZ said.

Reduced tax rates and weakened trend growth in GDP would limit the extent of any future increase in taxation revenue, the RBNZ said.

“Core Crown revenue peaked at 34.5% of GDP in the year ended June 2006. Budget 2010 prjected that revenue would be 29.6% of GDP this year.”

Most cyclical adjustment measures did not take account of moves in New Zealand’s terms of trade.

“Tax revenues are currently being boosted by a terms of trade that is well  above its long-term average. As such, if part of the improvement in export prices is not sustained, the underlying structural deficit may be even larger than the Treasury and OECD estimates suggest,” the Bank said.

“Stimulatory fiscal policy helped support aggregate demand over recent years. However, that support has meant interest rates have probably been higher than they would otherwise have been. And it is likely that the exchange rate has also been higher that it would otherwise have been.

“Discretionary actions to tighten fiscal policy typically result in some fall in the exchange rate, because monetary policy is typically set somewhat looser than otherwise to offset the reduction in domestic demand. Fiscal consolidations can sometimes boost the exchange rate as market confidence lifts.

“In contrast to the case in New Zealand, where sovereign debt is quite low, this sort of reaction typically occurs in cases where markets have already turned very negative on the fiscal situation of the country concerned and the exchange rate has already been under downward pressure.

The pressure the current exchange rate is placing on the tradable sector is significant. Improving national savings could relieve some of this pressure. Changing private sector savings behaviour is a slow process, whereas changing public sector savings can be made in the shorter term as an explicit policy choice.”

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


Bolly is spot on and we welcome his move to chop the RB budget spend by 50%, to take a salary haircut of 20% and set an example for the whole state sector. Well done that man..... 

This will help the Govt books too


No problem with it provided it is done on some sort of limited time basis. After all, welfare is supposed to be a safety net, not a lifestyle choice.

Therein lies the core of the real problem.

The lower-end want more of the cake. Via nets, anything.

The upper end want more of the cake. Via tax adjustments/spending reductions.

Sadly the cake is not only finite, but from here on in, is dwindling.

Less energy in the system from here on, and unless anyone can point to a greater source using a known technology and infrastructurable within 5 years, less work to be done.

Of a conventional kind.

Given the scarcity/higher price of energy, work may well morph of course, using more labour to do what fossil fuel did.

On a different tack slightly - it can be argued that from a Natural Capital point of view, a beneficiary has much less draw-down effect, as  they simply consume less. If we valued natural capital correctly (we never have) then it might just be better paying them than making them help trash the place at pace.

Just a thought......

Indeed I've always thought that economic recession/depression (and drought and/or other environmental calamity) will have far more to do with slowing the rate of rundown/degradation of natural resources than any government policies might do.

Don't worry....Bollard and Whitehead are going to lead the fiscal charge into reduced state salaries and jawdropping budget cuts at the RB and at Treasury....they will show the govt how it's done....they will rise above the greed and waste.....don't you think....they will won't they?

Gee what a surprise, the big government tax cut spend up/bribe didn't turn out to be tax neutral after all.

it's quite funny really and hypicritical really, all this preaching from the government wanting people to get debt down, and now thanks to their tax cuts they are one of our biggest problems.

Tax cuts are not a spend up by the Govt,rather they are cutting their income. After all, its the peoples/businesses etc money earnt to start with, & the Govt simply helps themselves to what they think they're entitled to.

The big problem here is the doubling of NZ Inc's annual budget under Labour over their 9 years in power, hence the requirement for a higher tax take.

I wish the current Govt would stop talking about "reductions in Increases" & start actually reducing the budget. A good start would be state department salaries, aye wolly.

Well said ! Government spending has continued to increase , under this National government ........... The difference is , they've exhausted the tax-payers' ability to fund their unproductive departments ........... And are now borrowing from foreigners .......... So we'll have to accept paying higher interest rates eventually &/or to sell off some more silverware , a dairy farm or 20 .

This government is gifting control of NZ's future to foreigners , in exchange for the funding to prop up Michael Cullen's dopey policies ...........How warped is that ! And Labour , if they get back into power , plan to build upon , to expand those seriously dopey policies , WFF being a case in point .

I reckon that National and Labour are Dumb & Dumberer !

Double-edged sword. Most of the people I graduated with are either in the UK, Australia or in a Government Department.

State sector cutbacks without private sector roles for them to move into will only increase the brain-drain. NZ will lose even more skilled people it requires to move up the export 'value chain'.

So why did they try to claim it was going to  be tax neutral, when to anyone with half a brain it was obviously not going to be?
Not the best time in the world for a governmet to take deliberate action that gets them deeper in debt.

Hello Wolly....Are you there?.... over

If JK and BK goes chop chop chop, then you can bet your bottom dollar Aunty Helen's party will be back in Wellington. The SFO will then need more people as more Ponzi schemes will be added.

BTW Wolly, agents are reporting W. Peters making a comeback for next election. Can you get another Bob the builder to sort that out? over........

That clicking sound from your phone is a "hello" from some friends in the Middle East old boy!

I see the headline above......... grenades being lobbed by funny that it could bring some return fire in the form of a budget reduction for the RBNZ and salary cuts for all senior staff!

You know, sometimes, all I think has become is a message board for Wolly and all his chums..

what a waste...  

I reckon you're right ! If Wolly & his chums cleared off , there'd be more space for you to blog .............. I guess this is the end of me , WKunz , Less Rude , rc , Count-of-Christov , St. Nick , Bernie Hickey , Roger Witherspoon , steven , powerdownkiwi , 28_29 yr old , kate , Mossad , Luxembergo , John Walley , Hugh P. , Elley , Rob of the North , KWJohn , Kiwidave , Parksy , Tribeless  ....... whew , so many of us , and a whole lot more . ....We gotta go ...............

.......... is cleared , she's all yours Horace ,  Merry Christmas buddy !

Bollard can continue with his grenades ..... it makes no difference.

What makes the difference is when the overseas lenders start throwing in their grenades into NZ ..... Euro zone problems....... to get their monies back from the property Ponzi schemes.

Information just in from Taupo ............ property sales.............reported dying needs CPR.

Wolly, stop taking cheap shots at Bollard in case they take you seriously and propose cutting our national super, where we know huge savings could be made [although shouldn't be as that would affect you and Me]

And what's with you going on about cutting the number of civil servants, you tried ringing IRD recently, it's so under-staffed. Can you imagine how under-staffed the Departments will be if even a few of the populist suggestions like capital gains tax etc are introduced and all the administration and monitoring and dealing with challenges, appeals and the like

"Cheap"...I'm getting a dollar a word on everything....isn't that right BH?.....and I just phoned the IRD and it took one minute to be connected and to receive all the help I wanted...excellent service.

John Key I have a lot of respect for you, self made man, kids, family man, down to earth, but please....grow some balls and start cutting Govt spending. Dismissing the retirement age debate is just gutless. No more working groups, reviews etc. I voted for you last time for a change, but you and labour are all the same. Make some hard decisions please

I reckon you're 100 % right ( and I am a BB ) . Labour are as culpable as National , in refusing to discuss the retirement issue . ........ And now the government is borrowing from offshore to keep it's spending going . Not a thought to balance the books , just an off the cuff remark from Wild Bill that the economy will grow , eventually , and " she'll be right " , then .

National =  Clueless .

Labour = Clueless .

NZ Inc = Screwed .

Funnily enough, GBH - I agree with you.

It's easy indeed to wipe debt on the way up, you just grow it into minisculitude.

Hard to impossible on the way down, it keeps getting relatively bigger.

Dime gets you a dollar these folk know we're on the way down permanently, but don't dare let of for esprit-de-corps reasons......

Time for a different system.

I got no respect for his income style - he just creamed-off. Nothing productive, just a cancer.

This is what he's faced with though:

No $$$ for you Wolly.........only more nuts from BH  :)

Oh yes, the clicking sound on my phone was from the Middle East. They want to know how NZ is going about paying their monies back for the Ponzi schemes...... Al'ham do li lah.......

I would be quite happy to be paid a kilo of fresh Cashew nuts per ten words.

Hello air control...... this is Helicopter Ben speaking..over

Air Control - Yes Ben, this is air control. What is your problem?

Ben - Air control, my helicopter ain't taking off.

Air control - What's the problem with your helicopter, Ben

Ben - Grounded.........errrh......printing problem!!!!

Click click :



Mossad - funny name in a peaceful forum ??!!

Good lord, Wolly has a hot line to the IRD. You a special informer or what?

There's a secret code we use to get through Muzza...takes less than a minute every time...honest!...they are always helpful and always give me some money back...quite a bit actually. It is one govt dept I have not worked in!

Yes Kunst.

In time of peace ..... prepare for war.  In time of war ...... prepare for peace.

I am together with comrade BH to get NZ'ers out of Ponzi schemes and Government BS spin as they often prey on the weak and old.

Mos-sad - funny answer in peaceful forum !! ??

See Muzza .... Wolly got the code ....... even go more $$$ back .......... swoosshhhhh.

A kilo of fresh cashews to Wolly, he may give you the code. Get to him quick before BH does.

Muzza, in the absence of knowing Wolly's direct dial code, next best thing is to  simply ring IRD and press the number that says you owe money, and you'll get through quite quickly.

And I bet you are always having to owe the IRD taxes to pay for all those of us who bludge off the welfare with the national super handout etc

Merry Christmas

And merry xmas to you too me and Muzza and Magnum....promise I won't waste the pension from day one which is not far off now. I reckon it'll go straight into an aussie greenfield gold prospect...wish it were me own too.....also have me eye on a Kiwi gold venture but not a peep here as I don't want to be fighting off the greenfly!