OECD Says N.Z. Needs Tighter Fiscal Policy as Economy Overheats

(Bloomberg) -- New Zealand's government needs to tighten fiscal policy to reduce the burden on the central bank as it responds to an overheating economy, according to the Organisation for Economic Development and Cooperation.

“Policy stimulus has contributed to overheating the economy, a house-price boom from already elevated levels and substantial increases in household and government debt,” the OECD said in its Economic Survey of New Zealand 2022 published Tuesday in Wellington. “Fiscal policy should be tightened in the near term to reduce the stabilization burden on monetary policy.”

Evidence the economy is overheating was apparent in inflation data last week that showed prices are increasing at the fastest pace in more than 31 years, while data tomorrow is expected to show the jobless rate dropping to a record-low 3.3%. The Reserve Bank was one of the first central banks to begin raising interest rates last year and it has signaled the need to keep tightening even as the nation braces for an outbreak of the highly transmissible omicron variant of Covid-19.

“The Reserve Bank has rightly begun a monetary policy tightening cycle,” the OECD said. “It has also indicated that house prices are unsustainable and has tightened macro-prudential policies.”

The Paris-based OECD forecasts that higher interest rates, and the prospect of less fiscal stimulus as budget deficits narrow, will start to cool the economy.

“Economic growth is projected to slow in response to macroeconomic policy tightening and the stabilization of commodity export prices,” it said. “Consumption growth will fall to a more sustainable pace as housing wealth gains diminish and employment growth slows.”

The agency sees economic growth slowing to 2.5% in 2023 from 4.7% last year. It expects inflation, currently 5.9%, will fall back into the top half of RBNZ's 1-3% target range by 2023. But it also projects the jobless rate will stay low, and will be 3.3% by late 2023.

It said the government's structural budget deficits and medium-term indebtedness will only decline slowly, and need to be addressed.

The OECD said New Zealand should consider lifting the age of eligibility for the state pension from 65 in order to help ease long-term pressure on the budget.