OECD raps Government over plans for spending

The Reserve Bank's efforts to dampen domestic demand are being hampered by Government spending, says a new international report.

The Organisation for Economic Co-operation and Development's Economic Outlook report said the Government's Budget surplus remained substantial and policy settings implied more spending in the period ahead.

"This is counteracting the bank's efforts to damp domestic demand, resulting in higher interest rates than would be needed under a more neutral fiscal stance."

The Reserve Bank has repeatedly warned in recent weeks about imbalances in the economy from rampant consumer spending, fuelled by the booming housing market.

The OECD also noted: "The task of bringing the economy back on to a sustainable growth path would be made easier if the Government delayed the planned easing in its fiscal stance."
National finance spokesman John Key said the OECD had targeted Finance Minister Michael Cullen's "profligate and unproductive spending".

The report also made it clear the OECD thought the Government was on a collision course with the Reserve Bank over rising Government spending, Mr Key said.

"The OECD is confirming what most economists have already concluded - that Labour's large spending increases are doing virtually nothing to provide a platform for sustainable economic growth.

"What is clear is that rising interest rates are, in part, caused by Labour's increased spending track. Dr Cullen can't continue to sheet all the responsibility back to big-spending home owners."

But Dr Cullen said the report, which contains summaries of economic conditions in all OECD countries, should silence the clamour for tax cuts.

He said the OECD was concerned at the economic impact of an added "fiscal stimulus" - meaning extra spending - beyond that already projected.

"This is the reason that Labour took into the election campaign by far the most fiscally conservative manifesto of any political party."

Labour's spending promises during the election included an expansion to Working for Families - said to cumulatively cost $1.338 billion to 2008-09 - and the axing of interest on student loans, which has been revised from $300 million in 2008-09 to $202 million. National promised $3.9 billion in tax cuts, which Labour said would push up interest rates. 
 

Outlook on NZ

Government spending is counteracting the Reserve Bank's efforts to dampen domestic demand.

Planned increases in Government spending are making the task of bringing the economy back on to a sustainable growth path harder.

The economy is projected to slow but imbalances will persist.

Higher interest rates have not materially slowed domestic growth, and risks of a "sharp correction" are increasing.