Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: Stay staunch, and save for worst

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Prime Minister John Key. File photo / Greg Bowker
Prime Minister John Key. File photo / Greg Bowker

The Government remains staunch in its commitment to return the Budget to surplus within three years.

That was the takeaway message from Prime Minister John Key's scene-setting speech yesterday.

It is not, of course, an unconditional, come-what-may, at-all-costs commitment.

If the "absolute worst" happened and there was a major shock to the world economy that meant sticking to the target "would actually harm the economy by forcing a sharp reduction in demand", it would think again.

But the threshold for such a change would be high - a "real global recession", he explained to journalists later.

That is not on the cards, though it cannot be ruled out.

Short of that, weaker growth and disappointing Government revenue would not be a signal that the Government should go easy, but rather for more fiscal belt-tightening.

More zero Budgets like last year's were "not impossible", Mr Key said.

It is a stern message given that the Government is already committed to a tougher budgetary policy (a bigger negative fiscal impulse, in the jargon) over the next two years than we have seen since at least the mid-1990s and probably since the Mother of All Budgets 20 years ago.

A weaker outlook for the world economy than the Treasury expected as recently as its pre-election forecasts has already seen it cut its forecast for New Zealand growth next year, albeit to a still reasonable 3 per cent.

And it has lopped $1 billion off its forecast Budget surplus for 2014-15 to a wafer-thin $300 million to $500 million.

Mr Key justifies sticking to the commitment to return to surplus by then on three grounds.

It is important for New Zealand's credibility in international financial markets. That credibility is money in the bank and once lost, hard to recover.

Stronger Crown finances (like those he inherited three years ago) give the Government more room to respond if the economy is hit by a major shock, like the global financial crisis or the Canterbury earthquakes.

And all else being equal it allows the Reserve Bank to keep interest rates lower than they might otherwise be.

Stabilising the economic cycle is the bank's job, he says. The Government's role is to plug away at reforms that will lift productivity and competitiveness.

Just as well, then, that Reserve Bank governor Alan Bollard, as he indicated yesterday, is in no hurry to start raising interest rates.

- NZ Herald

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