Editorial: Lesson we can learn on our debt problems

A warning placed on New Zealand's credit rating this week took the Government by surprise. It was quick to blame international bond market tensions over Ireland and others in the Euro zone.

This is no comfort. If finance markets are taking a harder look at small economies with large debts, we have cause to worry.

New Zealand shares few of Ireland's problems. The "Celtic Tiger" came to grief because of collapsed property prices that reduced its tax income at the same time as Irish banks exposed to property called on the state's deposit guarantee. Its forecast budget deficit is a fearful 32 per cent of GDP this year.

New Zealand's problem, says Standard and Poor's, is the external accounts and our consequent reliance on imported savings. It is unusual for a rating agency to worry much about the external deficit, which has improved to $5.6 billion from the $16.2 billion it reached before the recession reduced household consumption.

The Government's deficit was comfortably low before the recession struck, as was Ireland's at 25 per cent of GDP. Sovereign debt was not the trigger for this latest Euro crisis. Ireland has few bond issues coming to maturity and has sufficient borrowings to cover its deficit for the next four years.

It has budgeted for savings of $15 billion over that period, including $6 billion in spending cuts that come on top of an austerity programme that has already involved wage reductions and left the governing party deeply unpopular. But with foreign companies fighting to retain Ireland's 12.8 per cent corporate tax rate and the Government certain to fall at the next election, it is hard to have faith in the budget forecasts.

Irish banks have been unable to raise finance on wholesale capital markets, and rely on short-term loans from the European Central Bank. With that leverage the European Community has been able to enforce a bail-out, mainly to avoid a loss of confidence in other weak Euro economies.

Ireland will have to accept some stern discipline. It will be fortunate to keep the corporate tax rate that gives it an advantage over the countries that will be financing its fiscal deficit. It will certainly have to reverse the income tax reductions it thought it could afford in the boom when property provided much of its revenue.

New Zealand can count itself fortunate to have its own currency. No other country has cause to interfere in our decisions. If lenders lose confidence in the country the dollar would fall drastically, delivering the equivalent of wage cuts by making imports more expensive (and boosting export returns).

The dollar fell a cent after Standard and Poor's downgraded our rating outlook from stable to negative, but it would have fallen against the US dollar anyway as traders moved out of the Euro.

The credit warning is a message that our dependence on foreign savings must be reduced.

But the Budget deficit remains the first concern. The Treasury and the Reserve Bank have calculated that economic recovery will not restore the balance; spending commitments exceed estimated revenue by as much as 5 per cent of GDP.

Next year's Budget will need to bring private and public savings. But as Ireland's fate demonstrates, the public account matters most.