Deficit gap at widest in 30 years

The gap between what New Zealand spends and what it earns internationally is the widest it has been for 30 years, as exports languish, imports pour in and foreign-owned companies enjoy bumper profits.

A deficit of $13.7 billion was recorded in the current account of the balance of payments for 2005, the biggest relative to the size of the economy since 1975.

Just as an individual who spends more than he or she earns has to fund the shortfall by running up debt or selling assets, the deficit has to be funded by attracting foreign investment, including loans.

The cumulative effect of decades of deficits has been to push New Zealand's international liabilities, net of New Zealand investment abroad, to $136 billion.

That is $33,000 for every man, woman and child and a very high figure by international standards.

Paying interest on that debt and providing a return on that foreign investment cost $10.8 billion last year - equivalent to three weeks and four days' worth of the economy's output.

In recent years much of the inflow of foreign money needed to fund the deficit has come from Japanese and European mum and dad investors and has been used by the banks to finance fixed-rate mortgages.

But economists warn that that funding may be harder to attract as the gap between our interest rates and those available elsewhere narrows. That would require the kiwi dollar to weaken further and put a floor under how far the Reserve Bank can cut interest rates.

The upshot, say economists, is that consumers will find imports cost them more.

The balance of payments has worsened as exporters and the tourist industry have struggled with a high dollar over the past two years, while a buoyant domestic economy has sucked in imports of consumer goods and machinery.

The trade in goods has gone from a surplus of $3.4 billion four years ago to a deficit of $3.9 billion last year.

That was offset a little by a $400 million positive contribution from the trade in services, mainly tourism - but that surplus has shrunk from $1.7 billion two years ago.

At the same time foreign-owned companies have been enjoying higher profits, especially the banks, says Statistics New Zealand.

Westpac chief economist Brendan O'Donovan said: "The huge deficit reflects the past sins of an over-indulgent consumer and uncompetitive export sector. Correcting it will come from consumers spending within their means and a markedly lower currency. Both factors are under way but have a lot further to run."