Cullen says budget will offer relief for exporters

8.00am

Exporters battling the high New Zealand dollar can expect some relief in the budget, Finance Minister Michael Cullen said today.

The Government intended to take a more "pragmatic" approach to business assistance, Dr Cullen said in notes for a speech to Deutsche Bank Investor Forum.

This would be "evidenced further in this year's budget, with increased support for exporters," Dr Cullen said.

"Indeed, this year's budget will be somewhat more stimulatory than its predecessors.

"I would stress nevertheless that the level of stimulation will still be modest enough to ensure we do not stray from the straight and narrow path of fiscal prudence."

Dr Cullen will deliver his budget on May 27.

It will mark his second attempt to help out exporters, after he said this month he strongly supported allowing the Reserve Bank to influence the kiwi dollar.

The Reserve Bank had asked Dr Cullen to give it expanded power to intervene in the foreign exchange market to influence the level of the currency.

Dr Cullen pointed to a tailing off in the buoyant New Zealand economy, saying the export sector was "our major challenge".

While export volumes had increased over the past year, and export incomes were comparatively high "we are heading for turbulence", he said.

Dairy farmers were predicted to get the lowest inflation-adjusted payout in 14 years, he said.

"The effect across the sector will be a loss of around $750 million from the domestic economy as a result of the lower payout," he said.

"What this suggests is that beyond the immediate future, growth will slow temporarily as the effects of declining export incomes flow onto the domestic economy by mid-2004."

Dr Cullen said the trade-weighted exchange rate was around 42.6 per cent higher than its 2000 low, and had appreciated by 11.2 per cent since the start of last year.

That was out of step with the strength of the New Zealand economy relative to its major trading partners "especially Australia", and given the rising current account deficit.

Exchange rates at times appeared driven by speculative excesses and "herd behaviour" and to depart from economic fundamentals, he said.

"Excessive" exchange rate swings were costly, he said.

The best way to allow the Reserve Bank to influence the value of the dollar was being worked through, he said.

"Any intervention impacts are unlikely to be large; maybe a few cents at the peaks and troughs of the cycle, or alternatively helping the cycle to turn a little earlier than otherwise would happen."

An amended intervention policy would be merely one part of a broader response to the problem of exchange rate volatility.

"Whatever action might be signalled or taken needs to be seen in the context of, for example, the business support policies in the budget and ongoing work to improve business competitiveness."

- NZPA