New Zealand Economy Faces Massive Challenges

New Zealand Economy Faces Massive Challenges

“Today’s Budget Policy Statement indicates the massive challenges the government is facing as a result of the economic mismanagement of recent years”, Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

“The government is right to point out that the economy was already in recession before the international financial crisis unfolded, due largely to past policy failures.”

Mr Kerr said that the forecasts suggest per capita incomes in New Zealand will barely increase in this term of parliament.

Consequently the income gap with Australia will almost certainly widen in the near term, and big improvements in institutions and policies will be needed to achieve the government’s goal of closing it by 2025.

“The fiscal position the government has inherited is alarming and will be a drag on growth”, Mr Kerr said.

“Core Crown expenses are forecast to increase from below 30% of GDP in 2005 to an average of 35% in the three years to 2011.

“This means that the true tax burden is continuing to rise and the announced tax reductions are effectively being funded largely from higher borrowing.”

Mr Kerr said it was reasonable for the government to argue that spending should not be cut just to balance the books.

“However, it is not possible to argue that cutting low quality government spending is bad for the economy.

“Structural measures such as scrapping contributions to the Cullen Fund at least while the budget is in deficit, curbing the costs of ACC by exposing it to competition, and preventing future budget blow-outs from losses in its rail business are obvious priorities.

“The downside risks to the economy from current account deficits averaging over 8% in the four years to 2011 are large”, Mr Kerr said.

“The government is right to strengthen its resolve to take vigorous action to safeguard New Zealanders against these risks and we hope it will implement urgently a medium-term programme to substantially raise productivity and economic growth.”

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