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Thursday, June 10

Borrowing for tax cuts impedes economic rebalancing

The Government’s decision to borrow for tax cuts is leading to higher interest rates for home owners, a higher New Zealand dollar and a higher current account deficit, the Green Party said today.

“Bill English says that he wants to rebalance the NZ economy away from borrowing for imported consumer goods. But his decision to borrow for tax cuts has done the exact opposite,” Green Party Co-leader Dr Russel Norman said.
The Reserve Bank increased the Official Cash Rate (OCR) today from 2.5% to 2.75%.

“The Reserve Bank Governor told me at the Finance and Expenditure Committee today that the Reserve Bank was surprised by the size of the fiscal stimulus coming out of the budget for 2010/11,” Dr Norman said.

“This extra fiscal stimulus comes from the tax cuts that are funded by more Government borrowing.

“This increased borrowing has put upward pressure on the OCR and interest rates as the Reserve Bank seeks to limit inflationary effects of this increased stimulus.

“The increased interest rate puts upward pressure on the New Zealand dollar which will make it harder for our exporters, and those businesses competing with imports. The result is that our trade balance goes negative and our current account deficit increases.

“The Reserve Bank predicts that by 2013 the current account deficit will rise to 7% of GDP and the trade balance will fall to a deficit of 2% of GDP.
“The Reserve Bank today has contradicted the Government’s proposition that Bill English’s reforms are rebalancing the NZ economy.

“In fact the Government’s policies have added to the imbalances in the economy by borrowing for tax cuts, which puts upward pressure on interest rates, the New Zealand dollar and our current account deficit,” Dr Norman said.