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Account Deficit = Interest Rises

A staggering overseas deficit is projected in the pre-election economic and fiscal update released today, and Alliance leader Jim Anderton says it means interest rate rises are ahead.

And he says the so-called surpluses which National is relying on to pay for tax cuts are likely to vanish because rising interest rates will push up the Government's interest bill.

Treasury says the balance of payments current account deficit will reach 8.3% of GDP or $8300 million in the year to March 2000. That means the economy will spend more than it earns overseas to the tune of 8.3% of everything the economy produces in a year. Most economists regard balance of payments deficits over 4% as serious, but Treasury says the deficit will still exceed 5.8% of GDP in three years time.

Jim Anderton says the deficit will mean interest rate rises.

'Ordinary New Zealanders will feel the deficit as a sharp jab in the hip pocket.

'The government's finance costs will rise when interest rates increase and that will cut deeply into the so-called surpluses. If there is no surplus, the National party will cut Superannuation and health services and increase tertiary fees to pay for its tax cuts.

'Even Treasury itself says any fall in interest rates will be constrained by the balance of payments. In fact, the balance of payments is likely to increase interest rates. The deficit makes New Zealand a riskier place to invest, and that means we have to pay more to borrow from overseas.

'However, Treasury is projecting that the value of the New Zealand dollar will rise, from around 54 on the TWI to 60.

'A rising dollar means more imports and fewer exports, which would only make the balance of payments deficit worse. The projected rise in the value of the dollar would only be possible with significant interest rates rises which will cause another recesssion,' Jim Anderton said.

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