NZ takes home report card with good marks for prudence

By BRIAN FALLOW

Deferring any major Budget initiatives until next year has been endorsed as prudent by the International Monetary Fund in its annual report card on New Zealand.

Fiscal projections for the coming five years suggested budgetary resources might be available to fund some new policy initiatives, the IMF said.

But the room for new measures was not large and would depend on uncertain global economic prospects and continued discipline in Government spending.

It supported the cautious approach the Government had indicated it would adopt, of waiting until next year's Budget, by which time it should be clearer how much of the operating surplus was cyclical and how much structural.

As for what form any new initiatives should take, the IMF recommended a focus on policies which would further boost the participation rate - the proportion of the working age population either employed or actively seeking work.

The Government is reviewing the income support system to see how it might be simplified and how incentives to work - including through the tax system - could be improved.

But the IMF said that "pull" factors like reducing the high effective marginal tax rates which confront beneficiaries returning to work, should be combined with "push" factors like putting time limits on some benefits.

On the last point it does not see eye-to-eye with Finance Minister Michael Cullen.

The IMF said New Zealand was well-placed to manage adverse economic shocks.

Although its gross foreign debt had risen sharply over recent years, it had been more than matched by a rise in assets and the pace of external borrowing had slowed considerably.

Foreign debt had become more concentrated in the banking sector.

Corporate and bank balance sheets continued to look strong, the IMF said, and had proven resilient to large swings in the exchange and interest rates in the recent past.

Household finances could be affected by a surge in interest rates or a sharp fall in house prices, but the IMF noted that debt servicing costs had declined to around 7.75 per cent of disposable income, from a peak of 9 per cent in 1998.

"Provided there is no major correction in employment, households are likely to be resilient to a major rise in interest rates as they have been in the past."

In real terms, house prices had not posted sustained strong increases in recent years, it said, and there would not appear to be a substantial risk of a sharp decline in prices.