New Zealand must eliminate its budget deficit and reduce debt to strengthen the economy’s resilience to shocks, Reserve Bank Governor Graeme Wheeler said.
Returning to surplus “will strengthen the economy’s resilience and create more fiscal room for responding to future shocks,” Wheeler said in the text of a speech to business executives in Christchurch, the South Island city rocked by earthquakes in the past 2 1/2 years. Failure to narrow the budget shortfall “means monetary policy has to be tighter and interest rates higher than otherwise,” he said.
Wheeler’s remarks align him with Prime Minister John Key’s program to return to a budget surplus by 2015 by reforming welfare payments, selling assets and cutting expenditures. Wheeler yesterday kept the nation’s benchmark borrowing cost at a record-low 2.5 percent, where it has been held since March 2011, and said the government’s so-called fiscal consolidation is curbing the economic recovery.
“Important steps are being take to reduce government spending and this will be an ongoing challenge as demographic change will greatly expand government outlays unless there’s significant policy change,” he said.
Wheeler said New Zealand’s economic fortunes hinge on higher prices for its commodity exports, and on improved labor productivity.
“The good news is that there’s strong international demand for our commodity exports,” he said. “Our labor productivity story is much less impressive.”
Raising the level of saving and investment, and improving the quality of investment are means to improve per-capita income, he said.
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