The International Monetary Fund (IMF) warns the government and Reserve Bank (RBNZ) need to be careful removing emergency support from the economy.
It suggests the government continues to ensure fiscal policy is targeted. Meanwhile it maintains the RBNZ needs to make “significant increases” to the Official Cash Rate (OCR) in the near-term to get on top of inflation.
The Washington-based organisation included these recommendations in an annual review it did of the state of the New Zealand economy, following consultation with government authorities.
It said the RBNZ had to undertake “swift policy normalisation” to signal that addressing inflation is a priority.
The IMF said fiscal policy should “remain agile”. It credited the government for targeting support to businesses struggling due to Covid-19 by providing temporary support payments. It noted the importance of helping those who need it, without adding to demand pressures in this inflationary environment.
However, the IMF said the Government should not provide fuel excise duty and user charger cuts beyond the three months already committed to. Finance Minister Grant Robertson has kept the door open to extending the $350 million dollar policy beyond three months, should petrol prices remain high.
Rather, the IMF recommended introducing measures to better target vulnerable households struggling in the face of rising living costs.
It said public debt levels are sustainable and there is “substantial fiscal space” available to address downside risks.
The organisation said “downside risks dominate in the near and medium term”.
“The most immediate risks are further outbreaks of Covid-19 variants, either globally or within New Zealand, and further intensification of geopolitical tensions, which could adversely affect economic activity and inflation in New Zealand through weaker external demand and higher commodity prices,” the IMF said.
“Extended global supply chain disruptions could impact growth and inflation. Slower growth in China could have a significant impact on New Zealand’s economy given China’s importance as a trading partner.
“Apart from Covid-19, domestic risks are centered around financial stability and growth implications of developments in the housing market due to high household debt, borrowers’ vulnerability to rising interest rates, and banks’ high exposure to housing.”
The IMF was supportive of moves the government and Reserve Bank have made to date, which have directly or indirectly cooled the housing market.
However, it said providing local councils and iwi with financial incentives to step up the provision of basic infrastructure for new developments would be helpful.
Tax was another area the organisation saw room for improvement in.
“Transitioning from relatively high corporate income tax to other sources, such as capital gains and possibly land taxes, would improve efficiency without reducing aggregate revenues,” it said.
Finally, New Zealand’s response to climate change was inadequate in the IMF’s eyes.
“The recent rise in carbon prices is welcome, although addressing agricultural emissions - the largest single emissions source - will require the successful implementation of planned agricultural emissions pricing,” the organisation said.
“The forthcoming Emissions Reduction Plan is an opportunity to strengthen the price-based system, which would incentivize the adoption of new technologies and methods needed to achieve the targeted reductions.
“Parts of the proceeds of higher emissions prices should be used to further mitigate adverse social consequences.
“Complementary policies to address emissions, including through stepping up public investment and encouraging innovation, can help accelerate the transition to a low-emission economy.”
Beyond this, the IMF was generally happy with the management of the economy, including New Zealand’s Covid-19 response.
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.