KEY POINTS:
Generally it is not a good idea to hit the brakes and the accelerator at the same time.
But now we face the prospect of the perilous and undignified spectacle of the Governor of the Reserve Bank with his foot on one pedal while the Finance Minister has has his foot on the other.
For the past three years, while Governor Alan Bollard has striven to slow the economy down he has not had to worry too much about fiscal policy - the net effect of taxation and Government spending.
It has been either only very slightly stimulatory or, in 2005, strongly contractionary. In other words either not much of a hindrance or a considerable help to the bank's monetary policy.
But that is changing.
The Treasury expects fiscal policy to get more loose in each of the next three years than it has in any of the past nine.
Reflecting this, over the past four months in Bollard's statements an expansionary fiscal policy has joined the irrepressible housing market at the high end of concerns.
Appearing before Parliament's finance and expenditure select committee last month he made it clear the strength of the housing market was still his first concern.
While the unexpected strength of tax receipts had offset higher Government spending over the past few years the Government was now a net contributor to the pressure on resources.
That matters more than it might have, because the economy looks to be recovering faster and running hotter than the bank had expected.
It is coming out of a downturn that was too mild to properly vent the inflation pressures which had built up during the preceding boom.
So Bollard last month tightened the screws again and he may not be done yet. Even if he is, an easing seems remote. The brakes stay on.
Take the labour market. Even after two years of economic growth well below par, the unemployment rate is only 3.7 per cent.
In this week's quarterly survey of business opinion by the New Zealand Institute of Economic Research, firms report increased difficulty in finding labour and a higher proportion cite labour as the main constraint on increasing output.
This is not where you want to be at the beginning of an upturn.
On top of the consequent strength in wage growth comes the Working for Families package which, the Reserve Bank estimates, will add 6 per cent on average to the incomes of eligible families.
And Finance Minister Michael Cullen has indicated the business tax package to be unveiled in next month's Budget, which will kick in next April, will be worth about $1 billion a year.
When the Opposition accuses Cullen of a spending binge that will keep interest rates higher for longer, his stock response is that the tax cut plans National campaigned on in 2005 would have been more expansionary.
But that is the exercycle defence: it may work at one level but it does not get us very far.
Against this background it is unlikely to be an accident that the bank has published a paper by three of its economists reflecting on the impact of fiscal policy on the business cycle.
It turns out that - as so often in life - it's not just what you do that matters, it's how you do it.
A fiscal loosening through increased Government spending is "significantly" more stimulatory than tax cuts. When the Government pays out money, or leaves it in taxpayers' pockets, that tends to increase economic activity as the money goes round.
That "multiplier" effect may be somewhat boosted in New Zealand's case compared with some other countries by our greater propensity to spend and disinclination to save.
But other factors reduce the multiplier.
As a small open economy a large proportion of what we spend money on is imported so the domestic money-go-round effect is weakened and the leakage to the rest of the world is greater than in larger, more self-sufficient economies.
Also relatively high tax rates mean more of it goes back into the Government's coffers. There are also some "crowding out" effects which limit the stimulus.
An increase in Government spending puts upward pressure on interest rates and the exchange rate, which is not good for business investment or export incomes.
Government spending may require more borrowing and the competition between the Government and the private sector for funds could raise interest rates.
Government spending can also crowd out private spending by substituting for it, for example if an increase in public health spending displaces private spending on health care.
All those factors affect the demand side of the economy. What about the supply side?
Investment in infrastructure like roading may stimulate other, private sector investment. And there are long-term benefits to investing in eduction.
But the Reserve Bank economists do not think tax incentives for personal saving will make much difference to levels of investment in the economy, because of the ease of accessing foreigners' savings. The impact on incentives to work and the supply of labour from income tax cuts or transfers such as Working for Families will depend on how they are designed but are likely to be small.
Their overall conclusion is that fiscal policies can have significant effects on the supply side of the economy but take such a long time to have an impact that they will be outweighed by the effects on demand, at least over the time horizon that monetary policy is concerned about.
They expect fiscal policy to be significantly expansionary over the next couple of years as Government spending and transfers increase while tax revenue falls slightly.
The bank's analysis "suggests that fiscal policy could be a significant source of economic stimulus over the next couple of years". The drum beat running through these observations is the word "significant".
Just how significant Bollard thinks they are we will discover in the June monetary policy statement.
By then he will have more information, from next month's Budget, about the shape and timing of Cullen's fiscal plans, as well as more indications of the economic upturn and persistent inflationary pressures.
At this stage all you can say is: Borrowers beware.
