Faster return to surplus seen as taking pressure off dollar

Alan Bollard. Photo / Mark Mitchell

A faster return to budget surplus would take pressure off interest rates and the dollar, Reserve Bank Governor Alan Bollard says.

The Government's operating balance, excluding valuation gains and losses, has swung from a surplus of 2.7 per cent of gross domestic product in 2008 to a forecast deficit of 5.1 per cent in the current fiscal year. That forecast is due to be updated next Tuesday.

Much of the deterioration is seen as structural and will not unwind automatically as the economic cycle improves.

"Accelerated elimination of New Zealand's fiscal deficit could help improve national savings, thereby easing current pressure on interest rates and the New Zealand dollar, and reducing New Zealand's dependence on international borrowing," Bollard said yesterday.

His argument is that as the economic recovery gathers steam, policy stimulus put in place during the global financial crisis will have to be withdrawn. The more that happens through fiscal policy, the less work monetary policy will have to do.

Reducing the Government's deficit faster than envisaged in the Budget (which did not see a return to surplus until 2015/16) would lift national savings and thereby help the exchange rate.

These comments echo those from the Treasury and are likely to be endorsed by the savings working group, chaired by Kerry McDonald, when it reports in the new year.

But when pressed by MPs on the finance and expenditure select committee about where spending might be cut or what would be a good way to increase revenue, Bollard said that was not the Reserve Bank's responsibility.