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16 December 2009

Time to turn off the taps of stimulus

 While yesterday’s fiscal update delivered some positive news for the economy, the relentless growth in Government spending removes some of the shine.

“To avoid slipping back into recession we must keep a very tight rein on Government spending,” says Philip York, Federated Farmers Economics spokesperson

“The Half Year Fiscal Update and Budget Policy Statement appears to place the country in a stronger position than it was in earlier this year.

“But while news that the country’s deficit and debt are both tracking downwards is encouraging, it is more of a cyclical rather than structural improvement.

“It is now time for the Government to achieve that structural improvement by un-winding its fiscal stimulus package. Federated Farmers and the Reserve Bank of New Zealand have both called on the Government to take action in this area.

“Now that the economic stimulus – one of the largest per capita in the OECD – has effectively ‘shaved’ the sharp edges off the recession, there is no need to keep dropping money into what exporters feel is essentially a black hole.

“The stimulus measures, particularly those driving increasing Government spending, are delaying the economy’s rebalancing act. This act must surely involve the export sector or the worst is still to come.

“The alternative is that we risk sliding down the slippery slope of a ‘W’ shaped recession.

“To avoid that future, the economy must tilt back in favour of the tradable sector to kick start a sustainable export-led recovery. Yet this is no easy task while the New Zealand dollar remains high, reinforcing the need to bring Government spending under control.

“Until that happens, the Reserve Bank will struggle to do its job of implementing monetary policy and the Kiwi dollar will remain above its fair value of about US60 to 65 cents.

“Our economic recovery may well be a fragile one but reining in the stimulus measures will help bring the dollar and interest rates down.

“Federated Farmers makes no apology for demanding the Government show more ambition.  We want to see spending as a percentage of GDP down under 30 percent by 2013/14, far earlier than Treasury’s forecast of 2023/24,” Mr York concluded.

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