The New Zealand government's drive for fiscal austerity will hold back growth and keep interest rates lower for longer, the Reserve Bank says.
The central bank cited the government's clamp down on spending in a bid to get back to an operating surplus by 2015 as a constraint on economic growth and a reason behind New Zealand's historically low interest rate environment.
The bank says the government's efforts to build its revenue base through spending cuts and raising indirect taxes will slice four percentage points from nominal gross domestic product over the next four fiscal years.
"Fiscal consolidation is expected to have a substantial dampening influence on demand growth over the projected horizon," the bank said. "This consolidation will, all else equal, lead to a lower OCR (official cash rate) than would otherwise be the case."
The government's books came under pressure as recession hit the country just before the global financial crisis, and was followed two years later by a series of devastating earthquakes in Canterbury. Though the level of public national debt was relatively low, it ballooned as the costs of the quakes mounted, with a $20 billion bill tagged to the reconstruction effort.
That rebuild is seen as the driving force for inflationary pressures re-emerging over the coming years, though the central bank doesn't expect it charge out of control.
"Positive inflation will see effective tax rates increase over time, negatively affecting household disposable incomes and constraining private consumption," the bank said.
That will also lead to a contraction in household savings, with the bank predicting a return to negative savings rates for the next three years.
The bank projects the government's operating balance will remain in deficit as a percentage of GDP, falling from an estimated 4.2 per cent in the 2012 March year to 0.7 per cent in 2015, the year targeted for a surplus.