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IMF urges Govt to get budget back to surplus quicker

Tuesday 22nd March 2011

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The International Monetary Fund (IMF) is urging the Government not to let the effects of the Christchurch earthquake slow its efforts to get the nation's budget back on track to a surplus.

An IMF mission yesterday wrapped up a routine economic assessment of the NZ economy, and downgraded its 2011 growth projection for the country from 3% to 1%.

The Government said after last September's 7.1 magnitude Christchurch quake that it planned to get the budget back to surplus by the 2014-2015 financial year.

Finance Minister Bill English said the 6.3 magnitude aftershock on February 22 had caused it to delay the plan by a year to 2015-2016.

But the IMF said today that the Government should not delay its return to surplus.

"We advise returning to fiscal surpluses by 2014-2015, if the economic recovery proceeds as expected," the IMF said in a statement on its website.

It was both feasible and desirable to stick to the medium term target, even though the earthquakes had worsened the budget deficit in the short-term, it said.

"Fiscal consolidation would create a buffer against future shocks," the agency said. "It would also relieve pressure on monetary policy and thereby the exchange rate, helping rebalance the economy and contain the current account deficit."

"We project the 2010-2011 fiscal deficit to reach 9% of GDP, much larger than budgeted," the IMF warned.

Initial estimates put the cost of the damage of the original quake and its main aftershock as high as $15 billion - about 7.5% of GDP - with the Government likely to face direct costs estimated at $10 billion. Of the total cost, homes and the land on which they stood accounted for $9 billion of damage.

But the IMF predicted that economic growth would be boosted to 4% next year by earthquake rebuilding, as well as the Rugby World Cup later this year and higher trade. The quake damage occurred at the heart of the Canterbury region, which accounts for about 15% of the national economy. That growth would drop back to an estimated potential rate of 2.5% in later years, it said.

The nation's economic recovery had stalled since mid-2010 and domestic demand remained soft, as cautious households and businesses slowed their borrowing in a weak housing market and an uncertain outlook, the IMF said.

Damage and disruption from the quakes meant large uncertainty surrounded the economic outlook, particularly related to the size and timing of reconstruction.

Domestically, the negative impact on confidence and growth might be larger than expected, and a sharp fall in prices of over-valued houses would hit household balance sheets, likely depressing domestic demand. Similar falls in Australian house prices, which also appear overvalued, could spill over to New Zealand.

The quakes would boost public spending in the current financial year by $6.5 billion, including $3 billion funded by the Earthquake Commission, and net core Crown debt (excluding assets of the Superannuation Fund and advances) will rise to 22.5% of GDP by June 2011.



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