Budget to tighten Govt spending

John Key

Prime Minister John Key is planning to tighten the belt on government spending, not loosen it, in the Budget next month.

The government has decided against any fresh fiscal stimulus in the May 28 Budget because it cannot afford to provoke ratings agency Standard & Poor's into downgrading New Zealand's AA+ sovereign credit rating, Key told the Financial Times in an interview over the weekend.

New Zealand "cannot afford" to provide fresh fiscal spending for its embattled economy and was instead planning to cut government expenditure, the Financial Times reported Key as saying in the article.

"We don't want to challenge the ratings agencies by being overtly provocative," Key told the Financial Times in the interview. "We don't want to do anything that would precipitate a downgrade."

Key said he was betting that a falling Kiwi dollar would naturally allow the current account deficit (now at 8.9 per cent of GDP) to correct itself during the next one to two years. High levels of indebtedness were a thornier problem, the FT said. New Zealand households were estimated to be saving as much as 15 per cent of their income per annum, the lowest saving rate of any OECD country except Greece, it said.

Key's government had announced tax cuts and accelerated infrastructure spending that the OECD estimated would provide a fiscal expansion of about 5 per cent of GDP in the next two years, the FT reported.

Key said his government's first Budget would see expenditure at a lower level than the previous government.

"We can't continue to diet on debt because, if we do, in the long run we'll challenge the health of our economy," Key said.

Earlier this month, Finance Minister Bill English said the May 28 Budget would "map out a road for economic recovery as well as a credible plan for getting the Government's deteriorating finances in order".

He said that while the global recession continued to have an impact on finances, it was clear that the "patently loose spending policies of the previous Labour-led Government were unsustainable".

Some measure of fiscal restraint seems to be getting popular support, too.

Two-thirds of New Zealanders in a recent survey said they don't want the Government to go ahead with the next round of personal income tax cuts if it involves further borrowing to fund them.

Of those surveyed, 47 per cent also thought the first round of personal income tax cuts that began on April 1 should not have been made if they need to be funded by borrowing, considering the economic climate.

Bill English has previously said future economic circumstances would dictate whether the 2010 and 2011 tax cuts went ahead and taxpayers will be given an indication in next month's Budget.

- INTEREST.CO.NZ, additional reporting by nzherald.co.nz