Current Account Result

  • Bill English

The current account deficit reflects a continuing trend of New Zealand not having enough savings to finance the levels of investment being made here, Treasurer Bill Birch and Finance Minister Bill English said today.

"Today's result, showing a current account deficit of 6% in the December quarter, is a substantial improvement from the -6.6% in the year to September, and is significantly better than the market expectation of -6.8%.

"Economists are predicting that exports will grow faster as the international economy recovers, improving the current account deficit in the medium term.

"Yesterday, for example, the NZIER said the current account balance would improve to -4.4% of GDP by March 2001 and -4.1% in 2003.

"However our trade balance is not the major factor in our persistent current account deficit. The merchandise trade balance - our exports versus imports - has been positive for the last 12 years.

"Our current account will remain in deficit as long as our investment is higher than our savings. A current account deficit arises when a country saves less than it invests and has to meet the difference with inflows of foreign capital. "Both business loans for investment and household borrowing for home mortgages are funded through banks which raise capital offshore. "As long as the borrowing is for investment it is not a problem for the economy.

"Moreover, our strong, commercial banking sector, means these loans should be viable. They require an asset behind them, and an income to finance them."

The Ministers said the Government does not contribute to the current account deficit.

"The current account deficit is not the bogey it was in the 80s when it reflected a large Budget deficit and government borrowing - which is a period Jim Anderton and Michael Cullen seem fixated on.

"This Government has been a net saver for the past six years. We have been running Budget surpluses and paying down debt.

"Today's current account deficit reflects the saving and investment decisions of private individuals and firms.

"What will reduce the current account deficit over time is if households have higher savings rates so that we can supplement investment with domestic savings.

"The best government response, therefore, is to maintain surpluses and debt reduction and to continue with the process of economic reform. "It can be expected that raising people's incomes through growth, and tax cuts, increases their capacity to save, as will a better framework for superannuation.

"The interest shown by New Zealanders in the float of government businesses such as Auckland Airport, Capital Properties, and Contact also shows that people are looking for new opportunities for investment and savings and are prepared to put their tax cuts towards them."

Mr Birch and Mr English said New Zealand needed high levels of investment for strong economic growth.

"Economic growth is the key outcome we want. "However, the Government wants a better understanding of savings in New Zealand. The Treasury and ISI have begun work on this."