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Fiscal consolidation 'may persist' as economy rebalances

NZ fiscal consolidation 'may persist' as economy rebalances, Bollard says

By Paul McBeth

Aug. 9 (BusinessDesk) - The New Zealand government may have to keep its spending in check for a while yet as the economy slowly rebalances away from the debt-fuelled consumption of the past couple of decades that saw private sector borrowing rise to unsustainable rates, Reserve Bank Governor Alan Bollard says.

Households are slowly repaying their debts and increasing their level of savings since the global financial crisis as the economic recovery trundles along which has been hampering consumer demand, Bollard told an academic audience in Canberra.

"Although our fiscal positions are favourable relative to many other advanced economies, the debt overhangs, dependence on offshore funding and its sensitivity to sustainability concerns suggest that the current tilt of fiscal policy towards consolidation may persist for a while yet," he said in speech notes published on the bank's website. "Fiscal austerity is probably not as contentious when monetary policy loosening can offset its short-term effects on economic activity."

While events in Europe may spark another global downturn, local issues remain "the relatively heavy dependence of our economies on bank lending, the relatively heavy dependence of the banks on foreign funding, and the high degree of concentration of the banking sectors," he said.

The neighbouring nations' governments went into the global financial crisis in relatively good health, and while Australia came out favourably, "New Zealand is more in the middle of the pack of advanced economies," he said.

The trans-Tasman currencies relative strength has been underpinned by the world's larger economies expanding their balance sheets by printing money to keep interest rates low, and also through increased demand for Australian and New Zealand produced raw materials in emerging Asian nations.

That's encouraged consumers to buy foreign goods rather than local ones, which has squeezed the non-resources sectors and regions, Bollard said.

"In New Zealand, the most obvious relative decline is in import-substituting sectors," he said.

The Australasian nations' integrated banking sectors mean the neighbours need to work closely together, though New Zealand has emphasised the need for measures that "allocate losses appropriately to creditors and shareholders and to release residual claims on the back quickly, in the event of trouble at the banks," Bollard said.

The regulatory response around the world to the global financial crisis has seen a push for tougher liquidity and capital controls, and greater supervision. Still, not all of the proposed reforms in Basel III are appropriate for Australasia's banking system.

"In New Zealand we have placed priority on strengthening liquidity standards even before increasing capital ratios," he said.


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