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ECONOMY IS NOW IN THE BLACK By Lawrence Johnston FOR the first time since net debt records began in 1972, the New Zealand economy is now in the black. With net assets of NZ$0.4 billion it makes New Zealand just one of seven OECD countries that are in the black.But when making this announcement in a pre-Budget speech last month, the country's Finance Minister Michael Cullen said he was not prepared to squander that hard won gain by imprudent tax cuts. Instead, it now meant that New Zealand could face both the expected slower short-term growth and the more medium term rising spending pressures expected from an ageing population, he told the Canterbury Manufacturers' Association. It was clear that, after an extended period of exhilarating growth, the economy had slowed as a number of imbalances were corrected. There were some aspects of the economy that would stand New Zealand in good stead. It still had record low unemployment and some 300,000 more people in jobs than six years ago. In the last five years poverty and its costly social problems had been reduced. Whereas other economic downturns risked pushing a significant number of people into very real hardship, New Zealand families were now in a much more robust position. Strong household income growth showed no sign of reversing, and should continue to underpin strong domestic demand. Also, New Zealand now had much stronger regional economies in places like Northland, Gisborne, the West Coast, and Nelson-Marlborough. The faltering economies of such areas of the past, were now more diversified and better placed to see out some inclement economic weather. On the other hand, New Zealand now had widespread labour shortages, particularly in some key manufacturing and construction industries. Inflationary pressures remained uncomfortably strong, due to the tight labour market and ongoing strength in the housing market. Increasing petrol prices were also inflationary, but did dampen domestic spending. "There are some estimates that an extra $1.5 billion will be spent on petrol and diesel this year alone," he said. New Zealand's annual current account deficit widened to 8.9 per cent of GDP in the December quarter and was likely to expand further in the near term. Though he welcomed the recent drop in the dollar, Dr Cullen felt that it might take six to 12 months before many exporters benefited. The consensus was that 2006 would be a year of flat economic growth, but most commentators had forecast that the economy would pick up in 2007. Their reasons were expectations of a falling dollar, leading to improved export receipts, a slow decline in the current account deficit, and an essentially robust global economy. The main risk against such optimism was the world oil price, and its likely impact on New Zealand's trading partner economies. "This is a year to practice caution," Dr Cullen said. It was important for New Zealanders to realise that this temporary reversal of the country's economic fortunes was accompanied by a comparable reversal in other countries' fiscal positions. "I have been criticised for running large surpluses in recent Budgets, and throughout I have pointed to the forecasts which show the Government's accounts moving inexorably into a cash deficit situation in the out years," Dr Cullen said. That day of reckoning was now close. True there was likely to be another very strong operating surplus in 2005-2006, boosted by some "excellent" performances by Crown financial institutions and by the sale of Meridian's Australian assets at a large profit. But the forecasts clearly showed this would be the last big operating surplus for some years. For some time he had been bemoaning the unwarranted attention on the operating surplus as an indicator of the cash available to the Government for spending. New Zealand was heading for a significant cash deficit of some NZ$7 billion over the next four years which would require additional borrowing. He was not about to loosen fiscal settings during the good years, only to be faced with the prospect of harsh fiscal tightening when there was a downturn in the economy. |
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