KEY POINTS:
The Government has been told by a major international organisation to ease off on the spending and reduce the nation's tax burden in the forthcoming Budget.
The influential International Monetary Fund (IMF) has effectively told the Government to keep its hands off the economy so the Reserve Bank
can get on top of rising inflation pressures.
The IMF suggested the government's tinkering was preventing the Reserve Bank from achieving its goal of price stability.
They advised the Government to move towards greater tax reductions and smaller expenditure increases to moderate any expansionary effect.
Many directors on the IMF board cautioned tax credits for activities such as R&D would represent a step away from the current orderly tax arrangements, and could create distortions.
The annual report into the New Zealand economy recognised the Government's fiscal position was generally sound and that much of the stimulus reflected pre-announced spending decisions.
Nonetheless, they recommended that the automatic stabilisers continue to be allowed to work, and that fiscal stimulus be contained as much as possible in the period ahead.
The directors said special measures to limit buoyancy in the housing market deserved consideration.
"Fiscal policy should avoid complicating the task of monetary policy," the IMF directors said in a report on New Zealand released today.
Fiscal policy is that introduced by the government of the day - affecting taxation or social services spending, for example - while monetary policy, usually involving interest rates via control of the Official Cash Rate, is the responsibility of the Reserve Bank.
The IMF broadly supported the view that limiting the ability to deduct losses on housing-related investments from other income, combined with more active enforcement of tax laws, might help to discourage property speculation.
It said there might be merit in tightening prudential regulations to limit bank lending in the housing market.
This could involve the application of varying risk weights on mortgages according to the loan-to-value (LTV) ratio and the presence of mortgage insurance, and raising banks' awareness of the risks associated with "low-doc" and high LTV mortgages.
"Overall, directors nevertheless shared the authorities' view that these measures would not be a panacea given their likely limited impact, and that the OCR (Official Cash Rate) should remain the primary instrument of monetary policy.
The directors said improved productivity in the health system and a review of pension arrangements were needed to meet New Zealand's longer-term challenges.
They welcomed the emphasis on the need to save and in particular the planned KiwiSaver savings scheme due to come into effect on July 1.
The report said economic growth should rise to about 2.5 per cent in 2007 from 1.5 per cent last year, as domestic demand rebounded, but growth would likely remain below potential until 2009.
Exports were expected to grow only slowly, given the worsening outlook for inflation although high commodity prices would mitigate.
It said the country's exchange rate was above its long-run average, which would not help narrow the country's "unusually and uncomfortably large" current account gap, which was running at 9 per cent of GDP.
"(IMF) directors recognised that a correction might be delayed by continuing capital inflows, but also pointed to the risk of a sharper depreciation in case of a global event such as a sudden unwinding of the carry trade," the IMF said.
It approved of the Reserve Bank's recent moves to hike interest rates given the worsening medium-term prospects for inflation.
- NZPA