The International Monetary Fund (IMF) has said that New Zealand’s economy is broadly on the right track to return to full vigour.
The annual report stated that the Government’s current macroeconomic policy stance is appropriate.
It also said that the government’s plans struck a balance between the need to limit both public and external debt increases, while ensuring that workers and families are not badly affected by another economic shock, such as a melt-down of the European economy.
But the endorsement came with the caution that New Zealand’s financial situation is still fragile and that there was much to be done to improve economic performance.
One reason for concern, according to the IMF, is that the recovery from the effects of the global financial crisis has been modest.
Weak outlook
The New Zealand Institute of Economic Research also thinks that the immediate outlook is weaker than what was predicted in last year’s forecasts.
It noted in March that people still generally seem to be cautious about spending.
Further, the Treasury has indicated that growth in wages and employment is not as much as it had forecast in October 2011.
Lower economic activity has an effect on the Government’s financial position.
As the Treasury also reported recently, tax revenue was 2.3% lower than forecast for the year to date. This affects not only the Crown’s immediate operating deficit but also how quickly the Government can return to surplus and reduce reliance on debt to help finance Government spending.
While New Zealand is on course to recovery, these cautions remind us that New Zealand is not still back in full economic health.
Since the economy and the Government’s financial position are still delicate, we should be prudent and forward thinking with our economic decisions.
For households, it means controlling private debt and growing savings and investment. For the Government, it means being even more vigilant and thoughtful regarding spending.
This will require not only writing “zero budgets” in immediate years, in line with the IMF’s advice, but also involve aggressively reducing barriers to new, innovative businesses; improving participation and qualification completion rates for our poorest-performing school pupils.
There is also a need to improve the quality of New Zealand’s infrastructure, such as expanding access to broadband internet.
If the Government does these well, labour productivity should boost, leading to an increase in the rate of growth. This will bolster the economy and improve the Government’s financial position.
