The International Monetary Fund advises a cautious approach to tax cuts and the maintenance of firm monetary policy in its latest report on the New Zealand economy.
As in previous reports, the IMF staff have left New Zealand persuaded of the soundness of the policies the Finance Ministerand Reserve Bank Governor are already pursuing.
Reducing Budget surpluses over time from around 3.5 per cent of gross domestic product to under 2 per cent would be consistent with prudent fiscal policy, the IMF said. "But caution is needed in the near term to dampen inflationary pressures."
It worries that the unexpectedly strong corporate tax take of recent years will not prove durable and said it would be prudent to delay spending the "revenue surprises" which have boosted surpluses in recent years until it is clear they are structural.
It would rather a fiscal stimulus took the form of tax cuts than spending increases, although it sees merit in spending which lifts productivity by easing infrastructure bottlenecks.
The IMF said monetary policy should remain on hold "pending clearer indications of the future path of the economy". The report, though released yesterday, is dated April 17.
The overseas refinancing needs of the banks were a source of vulnerability, the IMF said. Non-residents provide more than a third of bank funding, of which two-thirds matures in a year or less. While the banks are well capitalised and profitable the IMF noted their high exposure to the home mortgage market at a time when debt-servicing costs have grown much faster than incomes and when house prices are overvalued (by 12 per cent at the peak last year, by its reckoning).
It welcomes Reserve Bank moves to improve banks' liquidity and encourage them to lengthen the maturity of their overseas funding.
The IMF estimates the dollar to be between 5 and 15 per cent overvalued.
Parliament's finance and expenditure select committee has yet to report on its inquiry into the monetary policy framework, which reflected concerns about the collateral damage to the export sector from the high dollar.
