KEY POINTS:
The Reserve Bank's gloomy assessment of the economic outlook shows that tax cuts could help stimulate growth without causing inflation, National's finance spokesman, Bill English, said today.
Reserve Bank governor Alan Bollard today offered some good news for mortgage-holders - interest rates cuts later this year, but that
only because economic growth was plunging.
Dr Bollard said:
* Household spending - the main driver of economic growth in the 2000s - will contract over the next couple of years, despite the Government's announced tax cuts.
* Economic growth will come to a virtual standstill this year and will grow well below par at 1.4 per cent in the March 2010 year.
* House prices are forecast to plunge from their peak last year, by 22 per cent when inflation was taken into account.
* Unemployment will almost double to 6 per cent over the next three years and job creation will go backward over the next four years.
Mr English said there were some hard months ahead.
"It's a tough outlook for New Zealand households.
"They are already paying the second highest interest rates in the developed world. They have to deal with the accumulated effects of policy that has kept interest rates higher for longer. Now they face high oil prices, high food prices and unfortunately a sharp kick-up in unemployment," Mr English said.
"Our job is to work through the priorities that are going to get through this down turn and back on to a growth path and the Reserve Bank governor has some optimism that we have a resilient economy that will get through the downturn and bounce back again."
Mr English said the extent of the downturn forecast by Dr Bollard meant that tax cuts were not a significant factor in inflation.
"We have to strike the balance between tax cuts that have longer term benefits on the one hand, but an economy turning down means higher costs for Government on the other."
The work in the service and construction sectors was likely to drop off as consumer demand dropped off and this could be boosted by tax cuts.
"It's important that we don't talk ourselves into real worry about it. It is going to be tough on households. The key to it is thinking about how to get through it and get on to a growth path and that is likely to be two to three years, not 18 months."
Mr English said he did not think interest rates cuts later this year would effect the political outlook for the Government.
Interest rates had doubled under Labour and voters would remember that.
"They are already feeling the pain."
The unemployment predictions were worse than those forecast in the budget and took New Zealand back to levels recorded during the Asian crisis in 1997/1998.
"They are a surprise, it will create a sense of insecurity, because for many people it has been job security which has underpinned the sense they are getting ahead."
Mr English said National was "fundamentally optimistic" that the economy would ride out the problems and bounce back.
"The main thing is too look through the downturn and not over react to it."
Asked if National's cutting of spending in the 1990s in the face of recession was an overreaction, Mr English said "In reflection it might have been."
- NZPA