OECD: run big surpluses

By Brian Fallow

WELLINGTON - The Government needs to return to running larger budget surpluses, given the risks posed by New Zealand's large balance of payments deficit, according to the Organisation for Economic Co-operation and Development.

The Paris-based rich nations club, in its annual review of New Zealand, said a gradual recovery seemed to be under way, supported by stimulative fiscal and monetary policies, but that the international environment added uncertainty to the outlook. The challenge facing New Zealand policy makers was to minimise the risks associated with the external deficit (currently 6 per cent of GDP) as they could threaten the sustainability of the recovery.

"Increasing the fiscal surplus as the recovery proceeds is important in this respect, both to retain the Government strategy's credibility and to reduce New Zealand's vulnerability in to changes in financial market sentiment," the OECD said.

While a small surplus, the sixth in a row, was now projected for the current fiscal year, a deficit was likely in 1999/2000 and possibly the year after, it said. That would represent a breach of the benchmarks set by the Fiscal Responsibility Act. A deterioration of the international environment could frustrate projected growth in exports, widening the already large current account deficit.

"This could lead financial markets to take a dim view of the sustainability of New Zealand's external position, potentially causing volatility the exchange rate and interest rates or an increased risk premium. If significant, such developments might reverse the recent improvement in business and consumer confidence and abort the incipient recovery in domestic demand," the OECD said.