International Monetary Fund warns Government to keep tight rein on spending

Money. Photo credit: Getty

The government needs to keep a tight rein on spending and the Reserve Bank should keep interest rates high as the economy posts slow growth, according to the International Monetary Fund (IMF).

In its annual health check on the country, it said New Zealand's economy would grow about 1.1 percent in the coming year, but would have to "tread a narrow path to a soft landing".

The economy had got a big dose of stimulus from government spending during and after the pandemic, which had spurred inflation and increased deficits, but the time had come for tighter controls and there was little room for mistakes, it said.

"Given considerable uncertainty, the risk of policy miscalibration remains," the report said.

It warned the RBNZ could not afford to cut the cash rate too soon, but also could not hold rates high when growth is slowing, which could hurt households and worsen a downturn.

The IMF put emphasis on the need for the coming Budget to be tight to help get inflation lower and for any tax cuts to be paid for, and chart a path back to surplus in four years.

"To avoid any upside pressure to inflation it is important to calibrate the funding, timing, and the parameters of this tax relief to be fiscally neutral.

"Spending reforms should be based on a comprehensive cost-benefit analysis of government programs ... the focus should be on spending areas which have increased the most since the pandemic, such as the wage bill, transfers, and social benefits."

The IMF repeated previous concerns about the need for more housing and associated infrastructure, and said policies to combat climate change were also needed.

It also renewed its call for an overhaul of the tax system to bolster investment, productivity, and fairer.

"Reforms should combine comprehensive capital gains tax, land value tax, and changes to corporate income tax."