The International Monetary Fund says New Zealand should keep its fiscal policy tight and focus any extra spending on the cyclone recovery and building social housing.
IMF is a global organisation that works with its member countries to promote global economic growth and financial stability. It is generally pro-trade and anti-poverty.
Any member countries that use IMF resources, or borrow money from the fund, get an annual visit from agency staff who monitor economic developments.
On Wednesday, IMF staff released a statement summarising the findings from their latest visit to New Zealand and encouraged the Government to keep a lid on its spending.
“Fiscal policy should prioritise the recovery from the floods and cyclone, while limiting other discretionary spending,” it said.
Operating and capital allocations for the rebuild in Budget 2023 were necessary, but further spending should be limited to avoid fuelling inflation.
For example, it said the reduced petrol tax rate should be allowed to expire as planned at the end of this month and not be extended any further. Other cost of living support should be means tested and targeted only at vulnerable households.
“The planned fiscal consolidation over the next four years is welcome and should be preserved. Public debt sustainability remains robust and there is substantial fiscal space to address downside risks”.
House prices still too high
The IMF said it remained concerned about housing affordability, despite the recent downturn in prices, and the government should work to expand supply.
“The cyclical downturn in prices does not imply that the structural housing shortage has been addressed. There is a strong need to expand housing supply, including for social housing, to improve affordability”.
A recent increase in new housing was good news and policy reforms that enable more supply should continue. Long-term affordability depends on freeing up land, improving zoning, and building infrastructure.
The rapid decline in house prices was only a correction from a run-up during the pandemic and a reaction to higher interest rates. Housing affordability, as measured by mortgage interest payments relative to income, has actually worsened.
Let OCR slow the economy
Higher interest rates will have the bulk of their impact on the economy in 2023 and 2024 and GDP growth is expected to slow to around 1% in each of those years.
There is still a possibility of a technical recession, defined as two quarters of negative growth, but the broader outlook is for slow but positive growth.
Inflation was likely to decline gradually and only return to the 1–3% target range in 2025 given the pick-up in non-tradable inflation.
“With the border reopening, net migration has picked up sharply in recent months and should further alleviate labour market tightness, though the effect on net demand is unclear”.
The IMF also said it was paying attention to the current account deficit, which hit a record 9% of gross domestic product in 2022.
Stats NZ data released on Wednesday showed the deficit had narrowed in the first three months of 2023 and was now $33 billion, or 8.5% of GDP.
“The expected slowdown and rebalancing of the economy and the recovery in services exports should ease pressures, but careful monitoring is warranted,” the IMF said.
The rapid tightening of monetary policy was working to lower inflation, but with non-tradable inflation seeming persistent there was “little scope to lower the Official Cash Rate”.
“A reignition of demand, including due to insufficient fiscal consolidation, and a stalling of inflation above target would call for further tightening of monetary policy”.
Reform tax, freeze minimum wage, and raise super age
IMF staff also weighed in on some more political policy issues, such as tax reform.
Without going into much detail, they suggested broader capital gains and land taxes could allow for lower corporate and personal income tax rates.
The government should address “fiscal drag”, which usually means indexing tax brackets to inflation, and generally improve efficiencies in the tax system.
Staff also discouraged further increases to minimum wage, saying any more changes should be aligned with productivity growth to avoid inflating overall wages.
Finally, they signalled support for retirement reform with a warning that it would be challenging to fund public pensions from current revenues as the population ages.