The International Monetary Fund is urging the Government to curb spending enough to return to surplus by 2014-15.

That is a year earlier than the Government envisages, but a year later than the IMF advocated last year, before the Canterbury earthquakes.

It has just finished giving the economy its annual check-up.

It expects the Budget deficit to blow out to 9 per cent of gross domestic product in the current 2010-11 year - higher than the 8 per cent or $16 billion foreshadowed by Finance Minster Bill English last week.

It includes $6.5 billion of earthquake-related costs to be booked in the current year, even though about half of it will be funded out of the Earthquake Commission's reserves and much of the infrastructure-related spending will not occur until later.

The IMF estimates that the country has an underlying structural fiscal deficit of around 5 per cent of GDP.

That needed to be tackled in light of the country's (as opposed to the Government's) high level of foreign debt and the looming heath and pension costs of an ageing population, the IMF's mission chief for Australia and New Zealand, Ray Brooks, said yesterday.

It was common for governments to overestimate how permanent an increase in revenue during boom times was. "The Budget needs to make credible steps to bring spending down, to assure investors that public debt is on track to return to 20 per cent of GDP," he said

The IMF advises reining in the deficit through spending restraint rather than any increase in the tax burden - though it favours broadening the tax base thought a capital gains tax and land tax, and supports indexation, where only real interest payments are taxable or deductible.

It favours the sale of state-owned enterprises and suggests that if the Government wants to subsidise housing or tertiary education it might be better to do so in a more direct way than by building up assets such as social housing and student loans on its balance sheet.

"There's really a significant fiscal challenge in New Zealand, made greater by the size of its net foreign liabilities," Brooks said.

"That's really the underlying motor for our advice - to reduce that external vulnerability."

How much the country could raise its debt levels was limited by the "tail risk"of a worsening of banks' asset quality.

The IMF estimates house prices are overvalued by 15 to 20 per cent.

Brooks said the Reserve Bank should think about the merits of raising banks' capital requirements gradually to levels higher than the forthcoming Basel III requirements.

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Short term outlook hacked but forecast for 2013 looks brighter

Economists have slashed their growth forecasts for the near term, though the outlook for 2013 has brightened.

The latest consensus forecasts, compiled quarterly by the New Zealand Institute of Economic Research from a survey of 11 private and public sector institutions, have cut expectations of growth for the March 2011 year to just 0.8 per cent, from 2.1 per cent in the December survey.

That reflects both a recognition that 2010 was weaker than previously thought and the impact of last month's earthquake in Christchurch.

For the coming March year growth of 2 per cent is expected, down from 3.5 per cent in the previous survey.

But expectations for the following year, to March 2013, have been revised up, to 3.9 per cent from 2.6 per cent in the December survey, boosted by reconstruction work in Canterbury.

Recent economic data had been lacklustre and dampened near-term growth forecasts, NZIER economist Peter O'Connor said. And last month's quake meant most reconstruction activity flowing from September's earthquake which had been expected to occur in the March 2012 year had been pushed back to the following year.

The labour market is expected to get worse before it gets better, reflecting displacement and job shedding in Canterbury, and to improve more slowly with a jobless rate of 5.5 per cent tipped in a couple of years compared with 5.1 per cent in the December survey.

Wages are forecast to grow 2.9 per cent over the year ahead, and 3.2 per cent the year after, up from 1.7 per cent in the year just ending.

Inflation is expected to run at 2.6 and 2.5 per cent over the next two years.

The balance of payments will get some temporary relief from the inflow of reinsurance money but forecasters expect the current account deficit to widen again to $10 billion (give or take $3 billion) by March 2013.