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.
53 Comments
How can we not borrow and spend?...we have net immigration high enough that we need to build a decent sized city every year.
So all those houses, a hospital, couple of dozen schools, water and wastewater treatment plants, roads, power, bridges, local government, police, shops, industrial and commercial, etc etc...
International migration: April 2023 | Stats NZ
72k in year ending April 2023 - first part of that year was under lock down still. Year ending Sept 2023 will be 100k plus.
Size of Hawks Bay?
Yet housing inflation and headline GDP growth are nowhere to be seen, despite the promise of imported consumers coming to the rescue.
Did we have to find out the hard way that a skill-agnostic migration system produces diminishing returns? A post-industrial economy probably needs some brains to go with all the pair of hands we're bringing in to work away in our kitchens and construction sites.
Canada and Australia are firmly on the same boat.
"How can we not borrow and spend?"
That is something that never happens anyway as the government is borrowing in its own issued currency it has to spend first before it can borrow back.
https://democracyjournal.org/arguments/the-truth-about-government-debt/
https://theconversation.com/how-government-deficits-fund-private-saving…
https://clintballinger.com/2018/11/13/decouple-spending-from-bond-sales/
'to promote global economic growth and financial stability.'
That's an oxymoron.
' It is generally pro-trade and anti-poverty.'
Yes to the first, ultimately it is causing the second, for more than it is helping now (if any - this is a matter of displacement in the now).
As always, no understanding of the Limits to Growth, or their repercussions on future generations.
So why give them oxygen? It's actually more skewing than what a recent RNZ person is being accused of....
Just sayin'
Tend to agree. My take from the article is that it is mostly virtue signalling while maintaining the power and privilege of the truly powerful elites. There is not a single thing that is forward looking, has any clarity of vision that would give the people of NZ any real confidence.
With inflation high the OCR will not be going lower for a few years and if the government does start house building program this will accelerate crash in house prices. So many people living in emergency accommodation and cars two or three families in one house, the government has to target housing affordability or social issues will degrade even more.
Nah parents would just shove the inheritance through before the law change and tie it up in an account with a contract restricting access to it unless it was in various scenarios etc etc. Too easy to avoid for the boomer wealth but the next generation will get stung.
All of these reports get dismissed because 'it won't work here in NZ"... "we can't compare ourselves to other countries".
I bet the bit about housing affordability doesn't even get mentioned by any party. It's become taboo now. A bit like Jimmy Savile. The truth is distasteful and unpopular.
Elevated interest costs are the new normal. In this falling market, if the heavily leveraged can't palm off their troubles to some other Schmuck they'll have to pay off every $$ the hard way. For most wannabe property flippers this was not a scenario that was envisaged from the outset. Property must be a market leader of personal wealth destruction with equity becoming vapor and all that dead money being forked out in interest payments. Those that showed courage and determination in the face of short sighted critics will no doubt be rejoicing they weren't caught up in this reset.
Yep R-P .....my sentiments too , as I have been called a "DGM" on this site, since time immemorial, for basically saying these prices (and price rises) aren't sustainable since 2012 !!
And here we still are in 2023, and overall NZ house prices STILL high for average incomes and all that mullah paid over the years in P + I mtge repayments....and by the day, capital values evaporating away !
There will always be winners in every boom, especially those that bought last century !! ....but the majority will be saddled with debt on a depreciating asset.
The "I'm all right Jack" attitude just permeates through NZ society, while employers are so tight, they don't want to increase wages to get better staff, as it might restrict them getting to that "great kiwi dream" of the "house, batch and boat, while we have to import "cheap labour" from overseas.
That's why we need a capital gains tax, as who is paying for all the new infrastructure ie schools, roading, hospitals etc etc etc
Too many folks trying to have their cake and eat it too ! ".....and this is the result.
So glad I stuck to the one property in NZ !! ....while the returns on those TD's are now where they should be !
Finally the tide has turned R-P !
100% right. Housing sale prices seriously detached from incomes in a massive way since the 2012 days, or earlier.
The Curve needs to revert to the 2%pa gain had up until the year 2001.......so we have a lot of drop still to go. The Indebted roadrunner is freewheeling his little no-traction legs......... with the road surface still 3 stories below!
Just wait for those overleveraged to get tetchy and snap back at your rational discussion around how it is for the betterment of all that their portfolio halves in value. All of the exuberance of the last 3-4 decades will come around and many will be sucking the lemon.
How things work with IMF is following:
1, a country spend beyond their means, usually with a huge trade deficits.
2, international reserves quickly running out, sometimes triggered by USD interest jumps, sometimes by hot money and loan sharks or international financial crisis.
3, the country gone into crisis. this is when IMF jump in like vulture, issuing loan to the country with strict conditions. such conditions usually are things like, reducing government spending, economical 'reform' (such as selling national enterprise, assets etc), improve 'human rights', sometimes 'political reform', you name it.
4, that country go bankrupt.
the cases like this is everywhere. the most famous one is South Korea back to 1998, which they describe the negotiation with IMF was like 'with a gun to their heads', and in the end, more than 2/3 shares of their top 8 banks owned by 'international investors', their flagship Sumsung became Wall Street owned. Koreans lost most control of their core assets.
https://www.amazon.com/Hidden-Repression-Exploitation-Development-Glads…
https://bitcoinmagazine.com/culture/imf-world-bank-repress-poor-countri…
https://www.youtube.com/watch?v=PM_XRlszu44 If you prefer to listen.
Enjoy the read mate, you will have your mind blown. Like actually.
While some argue they bring austerity via policy influence as a trade off for bailing countries out, they aren't wrong in this article. Land and capital gains tax, freeze minimum wage increases, stop wasteful govt spending, increase housing supply, and index tax brackets to inflation. Sounds very sensible for having enough money in the tax pot to fund all of the development of, and maintenance of already existing; infrastructure, healthcare, policing, education. All of the most important things, lest we deteriorate into lower education, further decreases in productivity while having higher aand higher wages.
The IMF isn't an institution to take seriously. Has a single country improved their economy as a result of an IMF programme?
South Korea. They were so ashamed of having to be bailed out that people were selling their family heirlooms and gold to get the IMF off their back.
None of this 'team of 5 million' nonsense. Koreans have real national pride.
It should be clearly noted here that in a huge majority of cases where the IMF has had to get involved with the countries affairs, that country has got worse not better. I don't mind the pension age going up with life expectancy as long as it also goes down with life expectancy should it then fall. People should not allow it to go up, because you sure as hell know it will never go back down again.
Great article - totally incompetent government - MMP has put too much control with minor parties - broad based approach to tax is needed - NZ now too divided with the left wanting unsustainable handouts - targeted handouts for those in real need are urgently needed, not broad based handouts - targeting tax at those people that create jobs is such a stupid idea - the Greens should be ashamed of themselves as it is short-term thinking - smart people create wealth in countries that have flatter tax systems - so NZ needs to remain relatively competitive with its tax system otherwise our competitiveness will deteriorate - Ireland is an example of where corporates shift their headquarters & countries like NZ only collect crumbs from their subsidiaries in tax
“Fiscal policy should prioritise the recovery from the floods and cyclone, while limiting other discretionary spending,”
By what possible measure is disaster recovery "discretionary spending" and what else is included under that heading? Managed retreat from untenable landscapes, is that discretionary? Climate crisis resposesm are they discretionary?
In the community, how many of us need to freeze, go hungry, die unnecessarily of treatable illness or grow up uneducated and incapable of participating in society for health, education, winter energy supplements and food price crisis mitigations to become non-discretionary?
If government does not exist to provide adequate living conditions for its community, it's purpose ceases to be positive and it simply becomes an agent of exploitation.
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