We have to be careful, says Cullen

Michael Cullen

Reserve Bank governor Alan Bollard's warnings about imbalances in the economy and the impact on inflation of more government spending have been welcomed by caretaker Finance Minister Michael Cullen.

Dr Cullen revealed that the warning about government spending had been passed by him to parties involved in talks with Labour to form a new government.

In a speech in Rotorua yesterday, Dr Bollard said the task of keeping inflation within the 1 per cent to 3 per cent target band had been made "particularly challenging" lately thanks to several factors.

These included strong household demand, higher world oil prices and their impact, and the likelihood of a "more expansionary fiscal policy".

More government spending had the potential to add inflation pressures to an already stretched economy.

He said the growing surplus had made higher government spending affordable in the long term, but in the short term it could aggravate the current account deficit and increase the work monetary policy had to do to contain inflation.

"These pressures need to be borne in mind as the incoming government considers its fiscal options."

Dr Cullen said he talked to Dr Bollard before the speech was given, and had passed to the parties Labour was discussing a new government with the tenor of those discussions.

"We do have to be very careful and be very conscious of the fact that any agreement is one that's got to be implemented without any significant fiscal loosening."

He welcomed the speech as a powerful reinforcement of the message he tried to get across to the media before the election - that there was little room to loosen the coffers with a large current account deficit and strong inflation pressures.

National finance spokesman John Key said Labour should reassess its planned spending.