The Government's plan to return to surplus by 2014-15 has hit the right balance with the International Monetary Fund, Finance Minister Bill English says.
In its statement on New Zealand, published yesterday, the IMF noted the Government's medium-term deficit reduction was aimed at limiting the increase in public debt to guard against future economic risks and contributing to lowering external debt.
"In our view, this strikes the right balance between the need to limit public debt increases while containing any adverse impact on economic growth during the recovery," the IMF said.
IMF mission chief to New Zealand Brian Aitken said the global lending agency supported the National-led administration's plan to get the books back in surplus as an appropriate balance between constraining public debt and protecting the economy.
"I don't think we would want to see anything dramatic, but I don't think the Government needs to take dramatic action. It is a kind of ambitious deficit reduction plan."
Mr Aitken said the "outlook for New Zealand looks good though it's not great".
The benefits of the Government's plan lay in withdrawing fiscal stimulus before the earthquake reconstruction and private sector recovery, giving the Government room to act in the event of another global shock, limiting pressure on interest rates to rise and helping contain an increase in the nation's net foreign liabilities, the IMF said.
Mr English said returning to surplus in 2014-15, while challenging, would make an important contribution to reducing New Zealand's external debt and improving national savings.
"Getting back to surplus will help create a buffer against future global shocks and, as the IMF notes, it will limit pressure on monetary policy and therefore the exchange rate," he said.
That was why next month's Budget would be zero, or close to zero, in terms of extra spending over the next four years, Mr English said.
The IMF said the major risks to New Zealand's economy would be external ones, particularly how the European debt crisis played out.
Mr Aitken said the Reserve Bank had scope to cut the official cash rate, now at 2.5%, in response to any major external shocks. Benign inflation expectations meant rates would not have to rise as much as they might have in the past.
That should lead to a lower exchange rate if it follows international experience, which needs to be weaker to bring the nation's projected current account deficit to a more sustainable level.
The Reserve Bank's accommodative monetary policy stance was appropriate, and given the high level of mortgages on floating rates, it would be able to remove stimulus quickly when necessary, he said.
The Christchurch rebuild probably would not lead to major inflationary pressure, as it would likely be a slowly phased project, rather than a rapid explosion of activity. Any rising prices would likely be localised to Canterbury and the construction sectors.
