Downgrade avoided but NZ needs to earn more.

The Government has achieved its immediate aim for the Budget, of avoiding a credit rating downgrade that could have pushed up borrowing costs.
Fitch and Standard & Poors have reaffirmed their ratings, but kept New Zealand on notice of a downgrade.
Standard & Poor’s says the Government’s targets for debt reduction, if met, will boost the country’s creditworthiness.

But according to some economists on Radio NZ Morning Report programme, the 4% growth forecast in 2014 is business as usual and not a growth forecast. There is no mention of an export recovery as the economy seems to be relying more on higher export prices and not an expansion in the volume of exports. Furthermore there is also a dependency on the injection of money into the economy for the rebuilding of Christchurch. No doubt the $10bn into the circular flow will have a positive impact but long term the government focus is still debt and savings. However it is the private debt which seems to be of greater concern at this stage.

Ultimately New Zealand faces a fiscal timebomb – NZ superannuation and health currently take up 11% of GDP and is expected to rise to 19% by 2050. The government has three choices:
1. Tax hikes but this will slow growth
2. Spending cuts – again less aggregate demand
3. Earn more – there must be greater policy focus on promotion of our exports.

NZ needs to use its comparative advantage in the primary sector and encourage more export growth

“Interesting that in the budget speech debt was mentioned 19 times whilst exports were mentioned twice.” Dr Ganesh Nana – Berl Chief Economist

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