Another year, another $8.2b in debt

The gap between what New Zealand earns internationally and what it spends has widened to a chasm.

The country's overdraft with the rest of the world - the current account of the balance of payments - widened to $8.25 billion in the year to September 30, up from $6.8 billion in the year to the end of June.

The deficit is equivalent to 5.8 per cent of gross domestic product, or in other words, three weeks' worth of all the goods and services produced in the economy. That is high by international and historical standards.

Economists expect the deficit to worsen before it improves and say it means the kiwi dollar should fall and the economy slow down.

A weaker dollar would be a welcome relief to exporters but would make imported goods dearer for consumers. And a slower economy means fewer new jobs.

As with a person who spends more than he or she earns, the gap has to be made up by borrowing or by selling assets.

In the September quarter the shortfall was financed mainly by banks borrowing overseas and by foreign investors lifting their holdings of Government debt.

The cumulative effect of decades of external deficits is that New Zealand is up to its neck in debt to the rest of the world. Its net debts total $118 billion, or $29,000 for every man, woman and child.

If it were not for the cost of servicing that debt, the current account would be roughly in balance.

Imports of goods exceeded exports by $1.6 billion but that was offset by a $1.3 billion surplus from services such as tourism, and by the money brought in by migrants.

But the investment income deficit was $8.2 billion, boosted by a highly profitable year for foreign-owned companies. Most of those profits were reinvested, however, rather than taken out in dividends.

In dollar terms, the deficit is the largest it has been since at least 1987 and probably the largest ever.

Relative to the size of the economy, it is the largest in four years.

But New Zealand's ability to service its international debt has improved since 2000. Then it took eight weeks' exports to cover interest costs; now it takes five weeks.

National's finance spokesman, John Key, said a large balance of payments deficit was understandable when Asia was in financial meltdown, "but now the world economy and our commodity prices have been enjoying strong growth".

"If this is what we get at the peak of an economic cycle, then we had better be worried about what happens when export prices fall."

The Reserve Bank has estimated that the state of New Zealand's external accounts means interest rates are about 1 per cent higher than they would be otherwise.

The international credit-rating agencies routinely cite the Government's Budget surpluses and relatively low debt as offsetting the dismal state of the external accounts.

What New Zealanders owe

* New Zealanders spent $8.25 billion more than they earned in the year to September.

* It would take three weeks of selling all our goods and services to pay off the deficit.

* Our accumulated overseas debt is $118 billion - $29,000 for every man, woman and child.