Deficit down but Cullen repeats inflation tax cut warning

By NZPA

Wednesday 20th December 2006

Finance Minister Michael Cullen today repeated his warning that tax cuts will lead to inflation, as new current account figures showed New Zealanders remain poor savers.

Today's figures from Statistics New Zealand (SNZ) put the country's annual current account deficit for the year to September at $14.4 billion, 9.1% of GDP. That is an improvement on the $15.1 billion, or 9.7% of GDP, recorded in the June year.

It was the first time since March 2003 that the year-ended deficit had narrowed between quarters, SNZ said.

The lower annual deficit was mainly due to a $1.4b increase in the value of imported goods, partly offset by a $700m rise in the value of imported goods.

For the September quarter the deficit worsened to $4.6 billion , compared to the June quarter deficit of $3.1b.

But when the data was seasonally adjusted the current account deficit for the September quarter was put at $3.1b, $418 million lower than the seasonally adjusted figure for the June quarter deficit.

The reduced quarterly deficit was mainly due to a $325m fall in the income earned by foreign investors in this country and a $138m rise in New Zealand investment income from overseas.

Cullen said the figures showed New Zealanders were getting no better at saving.

The country's net international debt -- the net amount owed to foreign lenders -- rose $6.1b to $121.2b for the September quarter. Overseas borrowing by banks increased by more than $21b from the September quarter last year.

That reinforced his messages from yesterday's release of the budget policy statement and half-year economic and fiscal update, Cullen said.

"In the short term at least, tax cuts without spending reductions would fuel inflation, aggravate the deficit and lead to higher interest rates and the dollar.

"In the longer term we must develop better savings habits if we are to reduce our reliance on foreign capital, strengthen New Zealand's capital markets and meet our individual retirement aspirations," he said.

Today's figures are better than had been expected with the median in a Reuters poll being a deficit of $5 billion for the quarter and a deficit of $14.8 billion, or 9.5% of GDP, for the year.

Goldman Sachs JBWere economist Shamubeel Eaqub said the deficit in investment income, at 82%, continued to be the largest portion of the current account deficit.

The investment income deficit stemmed from New Zealand having a net external liability and associated repayments equivalent to 86.8% of GDP.

Also the annualised return in the third quarter on foreign investment by New Zealanders was 2.9%, compared to foreign investors earning 5.7% on their investments in this country.

A net external liability position of about 60% of GDP was sustainable given national income, public debt and demographics, he said.

"While a catalyst for such a correction is not clearly visible in the near term, substantial NZD depreciation and/or increase in household saving would go some way to restoring some balance in NZ's external accounts.

"The other -- more abrupt -- route could be a change in foreign investors' willingness to invest (lend) in (to) NZ."

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