Lack of tax cuts a sensible move, says S&P

The Government's policy of running high surpluses and avoiding tax cuts are sensible responses to the impending elderly population boom, an international credit rating agency says.

Standard & Poor's estimates that New Zealand's elderly -- those over 65 -- will climb from 18.5 per cent of the population last year to 39 per cent in 2050.

That will put huge pressure on the Government in the form of more pensions, and greater demand on health and care services.

As a proportion of GDP (gross domestic product), it's estimated that age-related government spending will jump from 12 per cent to 21 per cent.

Such pressures are likely to put New Zealand's sovereign credit rating, currently a solid AA-plus, at risk.

S&P credit analyst Kyran Curry told NZPA from Australia that many countries were in the same boat, and that the current trends were unsustainable.

"The general feeling is they need to do probably a little bit more like what New Zealand is doing, and that is cut back on their spending and being a bit more fiscally restrained to respond to the cost pressures that will come."

Mr Curry said the call for New Zealand to make tax cuts like Australia had were "very shortsighted".

"New Zealand doesn't have coal to sell to China, like Australia does. Australia is benefiting at the moment from a lot of commodities...It's debatable whether (the tax cuts) are sustainable."

He agreed New Zealand has a high current account deficit like Australia, but New Zealand needed to maintain a strong fiscal discipline or credit agencies would downgrade them and borrowing would be more expensive.

"It'll make the investment environment a lot more difficult to operate in."

S&P welcomed the Government's decision to channel some of its surpluses into long-term superannuation funds, and also the move to put more public money into roading and other infrastructure.

With a weak dollar and gloomy export forecasts, the Government was walking a tight line between stimulating the economy and saving for a rainy day, Mr Curry said.

"Most forecasts are expecting the New Zealand economy to slow significantly...If anything we would regard the New Zealand budget as being fairly responsible."

Credit agencies looked at New Zealand's current account deficit which was "enormous and unsustainable" and needed to see that it was maintaining a strong fiscal balance to offset its vulnerability.

"If foreign markets lose confidence in New Zealand, then if people think the dollar is weak at the moment, it will go through the floor."

- NZPA