The International Monetary Fund (IMF) says the New Zealand Government needs to trim its spending, or risk prolonging high inflation and prompt another lift in interest rates.
It also implied the Official Cash Rate (OCR) was not high enough to bring inflation into the target range during 2024, and forecast that goal would only be met the following year.
The IMF publishes a report on the New Zealand economy each year, after visiting and meeting with its policymakers.
This year’s staff report said economic growth would remain slow in the near term as monetary policy works to bring down inflation.
However, it said that inflation would stay higher for longer than the Reserve Bank has forecast due to another dose of government spending in Budget 2023.
“Inflation will likely decline but remain above target in 2024, with new discretionary spending adding to pressures,” they wrote.
The external price pressures which first triggered inflation were easing, but non-tradable inflation had become sticky and the outlook was highly uncertain.
It said there was limited scope for the Reserve Bank to consider lowering the OCR, with output and employment gaps likely to stay positive throughout 2024.
IMF staff took a cautious view on the central bank’s current plan to hold the OCR at 5.50% for the foreseeable future. It did not explicitly disagree, but did not endorse it either.
“Should new data confirm that inflation is now on a durable downward path to the target, a pause in the tightening cycle could be warranted,” they said.
“On the other hand, a reignition of demand, including due to insufficient fiscal consolidation, and a stalling of inflation above target would call for further tightening of monetary policy, and there is a need for greater recognition of the fiscal-monetary policy interaction”.
Cut spending now
The report contained veiled criticism of the Government’s Budget 2023 which opted to expand spending despite fast inflation occurring in the already-too-hot economy.
Operating allowances were increased in Budget 2023 to $4.8 billion each year (1.1% of average GDP) with an additional $1.1 billion for fixing cyclone damaged infrastructure.
While Cyclone Gabrielle was often cited as a reason for the higher spending, the IMF said the budget was bigger even with the cyclone spending removed.
There was new spending on early childhood education, free prescriptions, discounted public transport, and energy bill subsidies.
The savings and prioritization announced alongside the budget only covered a “small share” of the new initiatives, and fiscal consolidation was only projected to begin in 2025.
IMF staff said more money should be cut from this year's budget and cost-of-living support should’ve been targeted at low-income households only.
Finance Minister Grant Robertson would’ve been aware of these comments when he announced $4 billion of spending cuts on Monday afternoon.
The IMF report gives the Government and its agencies an opportunity to respond to the report within the document itself.
New Zealand argued that fiscal expansion was needed to respond to the cyclone and the cost-of-living crisis, and cutting spending only in future years was appropriate.
“They agreed with staff on the need for a tighter stance in line with the fiscal rules and explained that the weather events have temporarily delayed fiscal consolidation, but it will be achieved in the forecast period (four years),” the report said.
Frontloaded growth
The IMF said New Zealand’s economy recovered from the pandemic faster than most other advanced economies. It grew 10% since the middle of 2020, fueled by fiscal support.
“But this came at the cost of significant overheating against capacity constraints exacerbated by restrictions on labor movement due to border closures and disruptions in global supply chains,” it said.
Now, the economy will have to pay back that stimulus-driven growth with a policy-induced slowdown. The IMF expects gross domestic product to grow 1% in each of the next two years.
But even this engineered slowdown may not be enough to bring inflation back into the target range. The IMF said policymakers needed to pay more attention to how fiscal and monetary policy interacted.
If government spending doesn’t fall and inflation gets stuck above target, further monetary tightening would be required.
“When inflation first started picking up in the second half of 2021, it was mostly driven by a spike in international food and energy prices and supply chain and shipping disruptions.”
Now, capacity is starting to catch up with demand as commodity prices ease and supply chains are repaired.
“However, non-tradable inflation has taken its place, keeping overall inflation high and sticky,” the report said.
This sticky core inflation means the headline rate won’t drop into the 1% to 3% target range until 2025, according to IMF forecasts. RBNZ has projected it will be in September 2024.
Call for monthly CPI data
To help the central bank make timely decisions, Statistics NZ should reconsider the possibility of compiling monthly inflation data — alongside its current quarterly measure. NZ's the only OCED country that doesn't have quarterly inflation data.
The Reserve Bank told the IMF it needed more real-time information, and the lack of monthly consumer price data was an important gap.
“The lack of a monthly CPI series makes New Zealand an outlier among advanced economies and is holding back a timelier formulation and assessment of monetary policy,” the IMF said.
Stats NZ is examining the possibility of publishing monthly price data but noted a monthly CPI series would require additional resources
108 Comments
OCR not high enough to slow inflation, no kidding. Its almost as if the Govt likes playing chicken with the risk of an international downgrade as the economy slows. Those holding on with low interest fixes must be feeling increasingly uncomfortable.
Rates higher for longer.
No, it hasn't. Things have gotten dramatically worse post-Covid and the RBNZ and Robertson (and their total lack of accountability to anyone) have to carry the can for that.
Yes, it hasn't been great, but don't gaslight people into thinking the last six years have been normal. They have been dire from a governance failure perspective.
100%. Lets take something that you would have expected Labour at its most basic to have improved, especially based on its race based Govt policies. The number of Maori on the unemployment benefit. Well, thats gone from 43,378 to 65,514 - thats a 51% increase. Labour "in it for them" LOL
Christ, another John Key acolyte. Those clowns were kicked out in 2017 in favour of a bunch of Labour unknowns because they achieved precisely ZERO.
They sat on their hands for a decade while water quality got worse, productivity tanked, house prices soared and every public service got weaker & weaker - all in the lie of “fiscal responsibility”.
They will sit on their hands this time too - devoid of ideas, led by the same old business drones, and will be kicked out after 1 term. But at least Fed Farmers and Ute buyers will feel good that their universe has returned to normal.
A little revisionism with your coffee Larry? For all their supposed inaction on close to everything, they still got more done than this current clownshow managed, even with an absolute majority. Or are you going to tell me that abandoning the flagship policies they spun as being doable to get their feet under the desk is somehow fine when team red does it?
No one's going to buy these talking points based (frankly verging on misinformation) this time around m8. There's six years of utter failure to justify before you can credibly drag up what National did over six years ago. If National 'sat on their hands' then there's no polite description of how far up their own backsides Labour must have had them.
Almost everything in the country is worse than when Labour came into power. So do you genuinely care about these issues, or are they just means of reinforcing your own political philosophy, and the people directly affected merely just collateral damage? Smells of "I'm alright Jack".
They sat on their hands for a decade while water quality got worse, productivity tanked, house prices soared and every public service got weaker & weaker - all in the lie of “fiscal responsibility”.
Can't agree more... All those underspending and giving bankers low interest rate environment in the hope of achieving'good inflation' ; but just pumping housing Ponzi .
No one here complains about our world leading household debt, which is what need to be repaid. The govt debt is not necessarily repaid.. RBNZ can do some magic and make books good.
The market is still slowly ticking along in affordable parts of the country ex Auckland. People outside Auckland are still spending. House prices within first home buyer reach are increasing in price, ex Auckland. People are still getting pay rises to match inflation or close to, inflation isn't going to drop much without further action from the RBNZ.
Precisely Sluggy. Debt free despite the many many convesations I had with people back in the good ol days telling me I was stupid for not loading up on debt and piling into the property market. The term "cheap debt" is rapidly becoming the stuff of nightmares for many.
Higher OCR rates will just end up being more punishment for those with higher mortgages (read: younger NZers/families) while those who managed to cash-out their sweet gains then get to make good interest and keep spending. It's too blunt to simply say "higher rates for longer" because it's just going to be business as usual for many who will keep driving inflation through spending.
I have to disagree with you there nktokyo, most developed counties also currently have high inflation and we are a net importer, these things are connected. The same with housing, USA, UK Auz all have high house prices, so I don’t think it's one specific government, they may go in with good intentions but once they get there, they find they cannot affect much change because there is a system much larger than them, much larger than one country, it's all a distraction of left vs right. If we are so independent, why does the same thing happen to all the countries at about the same time.
Ha, the IMF which is pretty much run by America, whose debt is higher than their GDP giving out advice, gotta love the irony!
Edit: Comment was out of sync so added name for context.
I very much doubt many swing voters were waiting until the IMF report to determine who they vote for.
But given this report is saying large cuts are needed - what are National offering?
- A very large inflationry tax cuts package, which for most it wont make any meaningful difference and any difference they will get will soon be eaten up by the extra inflation the tax cuts cause.
- A priomise to spend many billions on roading projects, on some very questionable roads in terms of economic return
- Not to mention a promise to not reduce health, super, education etc (i.e. all the big things).
So really, not much difference. Only National fanboys believe they can do it.
So i think anyone fiscally minded will look at what National are offering and swiftly move onto ACT. Of course those that remain with National are the ones that want 'others' to shoulder the cuts, not themselves. "I deserve this tax cut" but "Others need to pull their weight".
Only a true believer can think this IMF report reflects badly on a party which has been in opposition for 6 years - and for a chunk of that we didnt even have a parliament.
Labours genius tactic of spending like crazy until the wheels fall off, and now cut spending like crazy to appear prudent, and make other parties look bad, is rather transparent.
Yes Labour have their elbows out for sure, the last six months trying to cut into Nationals policy by getting there first. I just can't quite believe that we're in this situation where we need a government to put their best foot forward, yet our major parties only seem interested in squabbling.
first Labour government in 1939 was bailed out by the UK government to the tune of 1 million pounds (someone can work out the $ equivalent in todays money), the second Labour government spent up large for 2 years and then had to have the Black Budget to bail NZ out. The third Labour government (Kirk) sent NZ broke and the National Govt bailed NZ out with Think Big. The Forth Labour Govt had Rogernomics and we all know where that went. The fifth Labour Government (Clarke/Cullen) spent money but wasn't too bad, the Sixth has done what the previous 5 have done and waste waste waste.
Why do we let them do this to us????
Gee, maybe it’s because Labour governments actually try and govern. They get elected each and every time the other lot fail miserably.
We can all point to leaders and policies we didn’t like, but to think that a single entity is responsible for all the faults in a country speaks to a mind retarded by wilful ignorance.
Nothing surprising here, yesterday's 1-2% cuts are a drop in the bucket, need to add a zero.
Wellington consultants being paid $1000 plus a day are the problem, and if you look where those eywatering wages are going, overseas trips, new cars, overpriced houses.
It's like the government is trying to prop up wellington , while the regions pay
Rich men south of Levin, taxing us to no end.
Watch the tide go out, on the Welly wider regional economy in a big way, when the Govt largess is cut up and reduced in the next 2 years.
Welly property has already crashed but probably is due another 30% cut. Be Great to see the Rich men politicians, multi-house portfolios go South bigtime!
Overpaid and incompetent managers are a problem in both. In either case the people that actually make / do stuff are left with a pitiful share of the end result. Everybody wants something for nothing - rent seekers, bludgers, superannuitants, investors, consultants, regulators etc.
Depressing that 90% of politics is arguing about which of the above groups should get the biggest slice.
Yes and no. Plenty of consultants who work for themselves who will charge about $120-130 per hour, as part of a one year contract (which quite frequently get rolled over). That’s not a bad income for one year. I did that about 5 years ago for one govt agency.
Then of course there are those who consult to the government from economics consultancies etc. They will be charging well north of $200 per hour. But they tend to be quite discrete projects rather than longer in house contracts.
This govt only wants to make it worst since they know they are out of govt soon hence passing on a stuffed economy to the incoming govt so NZers have 3 yrs of pain so Labour hopes they will get re elected. They are the root cause of this yet as usual pass the buck. Either Robertson onto Orr, Adern/Hipkins onto the previous govt remeber upto only recently it was always the previous govts fault yet after 6 yrs still have made things worst and,all Hipkins can say is if you don't vote for us you are a gun loving racists. He can't even point to ONE thing that this incompetent govt has achieved not one.
"He can't even point to ONE thing that this incompetent govt has achieved not one."
https://www.labour.org.nz/our-record
Enough of the ranting please.
Took the bait and suffered through the Labor list of so called achievements.
The thing is that they don't list any achievements .
Just goals ,aspirations and programs they have initiated.(some of them are repeated to make the list longer)
Typical lefty touchy feely stuff with no measured outcomes..
Every metric they have supposedly improved has deteriorated.(health ,education ,crime etc..)
but the early in their first term they removed reporting and KPI,s from many govt departments so the result we now face was inevitable.
13,339 new public houses compared to the 1,500 lost under the last National Government. https://www.hud.govt.nz/stats-and-insights/the-government-housing-dashb…
Considering that there were only 5000 people on the public housing waitlist in 2017 compared to the 32,000 under Labour, I don't count that as an achievement. The fact you even needed 13,000 new social housing is an indictment in itself.
And the houses werent "lost" they were sold to Community Housing Providers, who continued to lease them to social housing tenants subsidised by the Govt.
Probably because you couldn't get onto a waiting list under National, they are always good at fudging numbers and nothing will improve if they win this time. https://thestandard.org.nz/what-is-at-stake-this-election-housing/
And yet they were housed under National because they werent all sleeping on the streets. Probably because there was plentiful cheap private rentals before Labour screwed up that market as well. Emergency housing costs in 2017 was $36 million, that's now $365 million a year under Labour.
Having read a few of these, I am coming to the opinion that the IMF is too invested in the 'free market' monetary policies. I would suggest that the problem is less about how much the government is spending, but where it is being spent, and that there are insufficient controls and limitations on the private banks and the amount of money they can create.
Government spending in areas that provide solid economic returns should not be an issue, but housing, some parts of social welfare and immigration just don't cut it.
Agree. If they were investing in transport, health and education infrastructure that provided a decent return then the government's largesse wouldn't be an issue. But they are squandering so much on inefficient ideologically driven centralization and social engineering. How much did renaming and rebranding all of our institutions cost??
The centralization of health systems and technical colleges has cost $billions with no improvements to services. Quite the opposite. The health system is in disarray and medical staff are leaving in droves. There are very few Kiwi staff left in our hospitals. The high turnover of staff has resulted in a health system in crisis.
Three waters will be a similar folly should they be re-elected
They really have made a pigs breakfast of everything.
Young friend and recent engineering graduate (Two years ago) visited home this week. He's earning 6 figures in AK and cannot see himself being able to save for a house deposit. Costs are simply too high. He's smart. I discussed strategies for saving and he's all over them and a few i didn't think of. Quite depressing really. Unless it changes soon, most kids should seriously consider emigrating.
And salary sacrificing so you get a big chunk of that income tax free. Take doctors and nurses for instance - they get $30k tax free automatically just for working in the health industry, plus their employers will probably have more salary sacrifice benefits on offer.
Jeez, those ghouls at the IMF are fools.
Maybe they could check the numbers and note that every 100pts of OCR rise increases Govt spending by $1.5M per day ($550M per year), or that every Govt spending cut reduces the tax take?
If they are so concerned about Govt spending adding to aggregate demand, maybe they should be just as concerned about over-consumption of the wealthiest 5 - 10% in NZ who earn a living from rent and dividends and are still spending big?
Maybe the IMF could note that consumer demand in the NZ economy is especially sensitive to rate hikes due to our ridiculous level of private debt and our short-term fixed mortgages - and that going toe-to-toe with the US Fed on rate hikes has left us in a deepening recession whilst the US economy, with its 30-year fixed mortgages, booms. Maybe they could spot that our $200bn of business debt means that the rate hikes have added $10bn of cost to businesses in the last year (nearly 3% of GDP) - might that explain the continued upwards pressure on our prices? Might that be sustaining inflation rather than quelling it?
I could rant on, but it is important to remember that the IMF are basically America's neoliberal, free-market enforcers - responsible for untold misery across the world. They should be consigned to history.
Isn't that also what government spending also does, it only becomes inflationary if the government is trying to out compete the private sector for resources. Households are using the governments money to pay down their debt or increase their savings and that is why the tax take is down and the foreign sector is also saving up our money due to our current account deficits.
If our aim is to reduce aggregate demand in the economy (which I still don't think is actually the solution) then we have a choice between:
- hiking interest rates to 'move' money from debtors to creditors (who have a lower propensity to spend)
- increasing taxation - targeted towards things / groups as appropriate
- reduced govt spending
- forced or encouraged saving (e.g. increasing minimum kiwisaver contribution)
I would rather reduce the spending of the big spenders than cut Govt services, but that's just me.
100% Agree.
The IMF is nothing but a mouthpiece for the mega-rich who disguise themselves as neo-liberals. For them to pretend there are but two ways to cut inflation - reduce government spending and/or raise interest rates - marks them as either woefully ignorant on economics or outright scoundrels beholden to the wishes of the mega-wealthy.
I could rant on, but it is important to remember that the IMF are basically America's neoliberal, free-market enforcers - responsible for untold misery across the world. They should be consigned to history.
Mostly true Jfoe. But important to remember that NZ has long been a poster child of 'doing things right' for the likes of the IMF. Reminds me of the goody two-shoes kid in class. Always has good grades and a favorite among teachers. Destined to be a head prefect candidate. Not really disliked by anyone. An Ardern type really.
Is this the IMF report that ranked us as one of the worst counties(alongside Equatorial Guinea) for Growth or is that another one?
Does the IMF have some inside knowledge of our position that we are not privy to.
Last week some commentators on here opined that when the books are opened there will be a massive fiscal hole..but the Author of this post at Interest.co assured us that we have an open and transparent govt accounting system and nothing is hidden.
I'm not so sure.The amount of Gaslighting over recent months(covid as an example) by this Government lends me to thinking we really are in the shit.
National can make all the promises they like but the economy will be that trashed that there wont be easy fixes.
The IMF is just an independent voice. Unlike MSM & the various working groups the govt engages in this country which don't want to bite the hand that feeds them. The IMF also advocates for a rebalancing of the NZ taxation system. Basically the lowering of income taxes and the introduction of a CGT. They are always ignored.
Grant gets a D minus report card :
The IMF said New Zealand’s economy recovered from the pandemic faster than most other advanced economies. It grew 10% since the middle of 2020, fueled by fiscal support.
“But this came at the cost of significant overheating against capacity constraints exacerbated by restrictions on labor movement due to border closures and disruptions in global supply chains,” it said.
Now, the economy will have to pay back that stimulus-driven growth with a policy-induced slowdown. The IMF expects gross domestic product to grow 1% in each of the next two years.
But even this engineered slowdown may not be enough to bring inflation back into the target range. The IMF said policymakers needed to pay more attention to how fiscal and monetary policy interacted.
If government spending doesn’t fall and inflation gets stuck above target, further monetary tightening would be required.
Yep. It was pretty obvious that the government’s fiscal response to covid would have major downstream fiscal impacts. As well as all the social ones (poorer education outcomes, depression and isolation etc). Obviously the approach saved lots of businesses and jobs, but I always questioned whether the government had properly analysed all the benefits and costs of their approach, and understood those and the various trade offs.
In summary while the government needed to do something, they did (and spent) far too much.
This repetitive "cut government spending to bring down inflation" nonsense from neo-liberal (mouth pieces for the mega rich?) organizations really annoys me!
They want you believe there's the only two ways to bring down inflation, cut government spending and/or raise interest rates. (Of course, neither of these affects the mega-rich in any significant way!)
It is total b.s.! There are other ways. For example, raise taxes on the people driving inflation.
With about half of inflation being created by businesses increasing their profits - greedflation - temporarily raising taxes on business profits seems a good place to start. Also - how about tiered tax bands for businesses the same as we have for PAYE?
The other half of inflation seems to be consumer spending. (I say seems to be as I believe a good chunk is actually down to inflationary policies from the RBNZ that have resulted in higher borrowing costs.) So how about taxing this inflationary spending by the people who are doing it? Air fares? Luxury items like cars, devices, etc?
That there are only two ways to address inflation is a myth. And a nasty myth at that.
Which is why many Labour Party supporters will be voting for the Greens.
Hipkins is going to seriously regret his foolish Captains Call which is way out of alignment with what most Kiwis want. More so as the 'middle' is becoming poorer by the day. This will probably be Labour's worst election result ever. And they thoroughly deserve it for this alone!
The guy reminds me so much of so many of the bureaucrats I encountered in government ministries. He worked there himself, right, before politics? Ostensibly pragmatic, but not really. Moderately smart but not very smart. Generalist knowledge applied in specialist policy areas - very dangerous.
CGT is different than a wealth tax though. Wealth tax looks to be a pretty fringe tax policy honestly, tried and repealed in France, and only currently active in a few countries. Why do we actually need that specific tax policy here, I haven't seen a single compelling argument why it is needed over other taxes.
They support it because they are too ignorant to understand the effects of one. When 1% of the population pays something like 25% of the total tax take, and they decide to up sticks for Australia or Singapore, then where is the tax money going to come from to pay for healthcare and education and social welfare?
Today NZ Herald paints a rosy picture about the IMF report. It’s a pity our MSM can’t report a more balanced view of the situation.
The paywalled Premium Herald article reported as follows:
“The International Monetary Fund (IMF) says the Reserve Bank’s (RBNZ) main Covid-era money printing programme likely improved the Government’s finances.
The central bank’s Large-Scale Asset Purchase (LSAP) programme is expected to directly cost the Crownnearly $11 billion.
However, the IMF believes the programme stimulated the economy so much, it helped boost the Government’s books by more than this amount.
It said, in a new report, the overall impact of the programme on the “medium-run level of public debt” is likely to “remain favourable, though small”.
RBNZ governor Adrian Orr shared a rosier view of the programme when the Herald pressed him on it a year ago. He said the benefits were worth “a multiple” of the direct cost.
The IMF doesn't understand central banking, QE does not create new financial assets for anyone.
https://www.bankofengland.co.uk/-/media/boe/files/speech/2023/april/qua…
https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/programs/…
If government spending doesn’t fall and inflation gets stuck above target, further monetary tightening would be required.
If a high proportion of your population is moving from the productive phase of their lives to a consumptive phase it'll always put political pressure on governments to spend on government services. Government have just been caving in to that pressure too frequently instead of moderating spending.
We need to change NZ Super so the age of eligibility increases and/or means testing so that the decreasing proportion of workers isn't funding a whole lot of retirees sitting in their houses managing their share portfolios while their brandy money is being paid by middle/low income earners trying to get into a house!
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