IMF report card endorses 'prudent' Cullen

Despite the strength of the Government's accounts, the scope for a more expansionary fiscal policy is limited, the International Monetary Fund warns.

The IMF's annual report card on New Zealand said the Government's tax and spending plans implied a small stimulus for the economy over the next few years - enough to expand the economy about 1.5 per cent over the next two years.

With the economy running at full stretch, a more expansionary fiscal policy than that risked increasing inflation pressures.

"Moreover, spending growth in a number of categories, including health and education, has been rapid in recent years and if such growth was sustained the objective of keeping the ratio of debt to GDP on a gradually declining path would not be achievable in the longer run," it said.

It "fully endorsed" Finance Minister Michael Cullen's intention to avoid a fiscal expansion that would put undue pressure on interest rates and the dollar, and agreed it was prudent not to spend an increase in revenues which arose from cyclical factors.

But the report includes a veiled criticism of the Government moves on the labour market.

The IMF said the flexible labour market had contributed to strong jobs growth and the low unemployment rate and warned that the flexibility should be "carefully preserved".

It advocates a "close review" of the effects of labour market measures adopted in recent years, including the Holidays Act and minimum-wage increases.