9 Jun 2012

IMF says cutting household debt key for NZ

6:31 am on 9 June 2012

The International Monetary Fund says the enormity of New Zealand's household debt is unique among highly indebted countries and getting that down will make the biggest difference to its debt levels.

The IMF says that calls into question how much reducing the Government's deficit will do to bring down the country's overall indebtness.

In its annual review of the New Zealand economy, the IMF says cutting government debt is usually the key for an orderly escape from high debt levels.

It says New Zealand, with its high private debt, and low government borrowings, casts doubt on that theory.

But Finance Minister Bill English says less Government borrowing will help the country earn its way out of its debt hole.

He says by borrowing less, interest rates will be lower - meaning less demand for the New Zealand dollar and an exchange rate that is more helpful to exporters.

But Labour and the Greens parties say the dollar is forecast to stay high despite the Government's aim to borrow less and other policies are needed to lower it.

The IMF says New Zealand's economic recovery is likely to remain modest, but will pick up as the earthquake reconstruction in Christchurch gains pace.

It forecasts growth to rise to 3.25% next year from an estimated 2.3% in 2012.

The IMF says the Reserve Bank's current monetary policy stance is appropriate, but it will need to gradually tighten if the recovery remains on track and risks dissipate.

However, even if the global recovery stalls, or international money markets are disrupted, the IMF says New Zealand's central bank still has room to cut interest rates and provide support to banks.

The IMF supports the Government's plan to return to Budget surplus by 2014-15, saying it should put New Zealand in a better position to deal with future shocks and the long-term costs of an ageing population.