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.
(BusinessDesk)