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Treasury urges govt to avoid fiscal stimulus

Thursday 4th December 2008

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New Zealand's government budget for the current fiscal year will provide fiscal stimulus equivalent to 2.8% of gross domestic product and the government needs to avoid further fueling the economy, according to the Treasury.

"The use of fiscal stimulus will be costly in the short term and may require savings later to avoid further deterioration in the medium-term fiscal outlook," briefing papers to incoming Finance Minister Bill English say. "Our judgment is that a stimulus package is not required at this point."

The briefing paper, dated Nov. 19, says policies announced by former Finance Minister Michael Cullen in the May budget such as tax cuts that started in October are already stimulating the economy. The National government plans additional tax cuts from April 1 and a ramp up of spending on infrastructure projects such as roads, schools and irrigation schemes.

The economy fell into recession in the first half of this year and combined with a global economic slump, spurred the central bank to make a record 1.5 percentage point cut to the official cash rate today. Governor Alan Bollard said he expects a modest revival in growth in 2009.

The Treasury paper's recommendations include a cut to the top income tax rate over the medium term. New Zealand is heading into a period of wider fiscal deficits and increased government debt in the face of a weakening economy, the Treasury said.

By Jonathan Underhill

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