30 Nov 2011

NZIER warns govt spending cuts could slow economy

6:49 am on 30 November 2011

NZ Institute of Economic Research principal economist Shamubeel Eaqub says the Government needs to be careful to cut spending without depressing already sluggish economy activity.

The Organisation for Economic Cooperation and Development on Tuesday lowered its forecasts for the New Zealand economy to 2.5% next year, rising to 3% the year after.

The new forecasts are well below the 4% forecast in May and are also lower than Treasury predicted in its pre-election forecasts last month.

Mr Eaqub says the delay in rebuilding Christchurch is slowing growth and Europe's debt problems are weighing on the global economy.

He is hopeful some sort of solution for the eurozone crisis will be cobbled together eventually.

But if the situation does worsen, New Zealand and other countries face a big dilemma.

"Revenue is going to be under pressure and government deficits will widen. The question is can we give fiscal stimulus yet again like we did in the aftermath of the global finacial crisis.

"For New Zealand's case I think we will be hard pressed to have a lolly scramble," he says.