The International Monetary Fund is recommending the Government curb spending more, and return to surpluses sooner, than it currently plans to.

The IMF has just completed its annual check-up of the New Zealand economy. The senior official involved, Asia and Pacific division chief Ray Brooks, said the key vulnerabilities continued to be levels of household debt and external debt that were high by advanced country standards.

"We see the need for fiscal policy to do more work to reduce some of those vulnerabilities," he said. "We are certainly encouraged by what the Government has committed to in terms of containing the growth of net public debt to 30 per cent of GDP by 2016 and bringing it down over the longer run to 20 per cent. But we are advising further spending restraint to return to surpluses earlier than planned."

It would provide more insurance against future shocks.

"A lesson of the financial crisis is the desirability of being able to run deficits when needed without raising market concerns about fiscal sustainability."

It would also take pressure off monetary policy and the exchange rate.

A recent "think piece" by the fund's chief economist, Olivier Blanchard, suggested having a higher inflation target for monetary policy, perhaps 4 per cent, might be useful in giving authorities more room to cut interest rates in an emergency.

But Brooks distanced the fund from that proposition in this country's case.

"In the case of New Zealand we think the current monetary policy framework is appropriate and in line with best practice.

"We see no clear benefits from raising the inflation target and there may be considerable costs - greater inflation uncertainty and reduced credibility to the authorities' commitment to price stability, which could lead to a higher costs of capital for New Zealand given its reliance on international capital."

Tax reform, which shifted some of the tax burden from income to consumption, could be useful in raising household savings and reducing the reliance on imported savings, as would fiscal restraint which reduced the Government's own need to borrow.

As it is, the IMF projects the current account deficit will rise from 2.9 per cent at the end of 2009 back above 8 per cent by 2015, increasing the country's external debt and the associated vulnerability.

So the fund welcomes moves by the Reserve Bank to reduce the banks' reliance on short-term funding from wholesale markets of the kind which froze during the crisis.

Turning to the robustness of an Asian-led global recovery, Brooks said he had lived in Beijing for five years.

"I'm an optimist about China having seen that growth between 2001 and 2006."

China's stimulus, in the form of massive public spending and loans from the banking system, had been very helpful in pulling Asia and the rest of world - Australia and New Zealand in particular - out of the crisis.

It had already taken measures to slow lending growth to limit the risks, not so much of inflation but of bad loans.

Brooks and a colleague had looked at spending by provincial governments on health and education. Where they increased that spending, household consumption rose.