Rising dollar puts pressure on government books

1.30pm

The Government has opened its books ahead of the election, revealing that the strengthening dollar is putting some pressure on the economy.

The latest set of books was finalised just weeks after the Government released its budget and contains few changes outside those caused by the appreciating dollar.

Treasury has shaved its growth forecast for the 2003/2004 year to 2.7 per cent and this will flow on to slightly reduced surpluses for the Government over the entire forecast period.

Since March the exchange rate has increased from 52 on the trade weighted exchange rate to near 57 and has gone from buying about US44 cents to more than US48 cents.

While most economists are picking the dollar to lift to the 50 cent mark soon, Treasury is still predicting the exchange rate will remain about current levels.

"A much more cyclical and less benign exchange rate path represents one of the key risks," Treasury wrote in its Pre-Election Economic and Fiscal Update (Prefu).

Treasury believed the economy has grown faster than usual at the beginning of this year and Gross Domestic Product growth of 3.1 per cent is expected over the year to March 2003 unchanged from its budget forecasts.

Export volumes are expected to grow, but the profits exporters make will be reduced and importers will benefit from the dollar.

Treasury believed these two factor would balance out and inflationary pressure would fall for the rest of the year.

The effect on the Government's surplus is all negative in the short term with the estimated actual surplus for the year ending June 2002 down from $2.63 billion to $2.41 billion and in 2003 down $2.28 billion to $2.20 billion.

Treasury estimates the changes will mean the Government will have to borrow $450 million more over the next five years, but is planning no change to the domestic debt programme.

Finance Minister Michael Cullen said the opening of the books revealed a "robust economy and a robust Crown balance sheet."

The Prefu has growth averaging around 3 per cent over the next four years, continuing low employment and high employment with wages growing without triggering a spike in inflation.

Dr Cullen was confident that the Government could continue to make contributions to the New Zealand Superannuation Fund while keeping gross debt below its target of 30 per cent of GDP.

Treasury's Prefu is part of the fiscal responsibility laws imposed by Dr Cullen's predecessor Ruth Richardson. The law is intended to stop incoming governments being surprised by the state of the government books as they were in 1984 and 1999.

Dr Cullen said "there was some concern" about the rising dollar, but the reality was that it was being mainly driven by a revaluation of the US dollar.

- NZPA

Full text:

Pre-election Economic and Fiscal Update 2002

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