Govt told to curb spending

The International Monetary Fund has warned the Government to get spending down and debt under control by 2010/2011 or face downgrades from credit rating agencies.

A preliminary report by the IMF after its recent visit said forecasts of public debt would shake investor confidence in New Zealand.

Low priority spending should be cut, but the "required adjustment" was so large that the Government would have to consider raising revenue - taxes to bring debt levels down.

"(IMF) staff advises that concrete measures be laid out in the May 2009 budget to stabilise gross public debt in the medium terms and bring it back to around the current level in the longer term," the report said.

The medium term objective date should be 2010/11 when the IMF believed the economy would begin to recover from recession.

Prime Minister John Key has already raised the possibility that further tax cuts scheduled for 2009 and 2010 may not be able to go ahead.

The IMF also said that in the long term New Zealand would face pressure on health and pension budgets, and called for their reform.

In January, rating agency Standard & Poor's cut the outlook on New Zealand's AA-plus foreign currency rating to negative from stable, partly due to deteriorating external finances.

In a statement issued at the conclusion of a staff mission, the IMF said it expected the New Zealand economy to contract by 2 percent in 2009, with a gradual recovery over the medium term.

Data today showed annual current account deficit widened in the fourth quarter to nearly 9 percent of GDP on higher imports and a shortfall in investment income.

The IMF said New Zealand's high external debt constrained fiscal policy and could undermine investor confidence.

"In light of these concerns, there is very limited scope for additional fiscal stimulus beyond the sizable stimulus already in the pipeline," the statement said.

That was one reason the IMF felt monetary policy could do more.

"The Reserve Bank should continue to reduce the official cash rate," the report said. The Reserve Bank has so far cut its key rate by a total 5.25 percentage points to a record low 3 percent.

The IMF agreed with the Reserve Bank that rates needed to be set at a level that still attracted offshore funds.

"However, the staff encourages the authorities to consider alternative instruments, including quantitative easing, and their potential efficacy in the unlikely event that such measures are needed," the IMF added.

The Reserve Bank cut rates by half a percentage point earlier this month, but Governor Alan Bollard said he did not expect New Zealand to see a near-zero rate policy like that adopted by other countries.

That led analysts to the view the end of the easing cycle was near.

- NZPA