Addressing a business audience late in January, RBNZ Governor Alan Bollard championed the country’s inflation-targeting monetary policy. He said it had proven flexible, durable and successful. It had been tested through a long period of growth, as well as droughts, migration shocks, terms of trade changes, an Asian crisis, a dot-com boom and bust, and, most recently, the worst global economic and financial crisis seen in generations. But other factors mattered. Among them, a successful removal of the recent fiscal stimulus would ease pressure on monetary policy. An economics reporter – who interpreted Bollard as saying he hoped to see reduced Govt spending – was chided by an RBNZ flak. The central bank had not mentioned Govt spending, had it? The RBNZ generally never specifies spending vs revenue when it talks about fiscal consolidation.

Fiscal Consolidation. Bollard is still talking about the need for fiscal consolidation. But the interpreter of the expression last week was Finance Minister Bill English, who told Parliament on Tuesday the RBNZ’s latest Monetary Policy Statement highlighted the longstanding structural imbalances in the economy, and highlighted the need to move away from an economy based on big increases in Govt spending and high levels of household borrowing, to an economy based on savings, exports, business investment, and new jobs. In fact there are few mentions of “Govt spending” in the MPS.

Dampening Influence. It does say the economy continues to recover, reflecting improved world growth, higher export commodity prices, increased Govt spending and housing strength. It talks of an expectation many countries will now be embarking on fiscal consolidation and many will elect to do this by either increasing taxes or cutting Govt spending, which will have a dampening influence on global growth. And it says its fiscal projections are based on the Half Yearly Economic and Fiscal Update, adjusted to reflect the updated macroeconomic outlook. Govt spending volumes are forecast to retain a roughly constant share of output through the coming years. The impulse from fiscal policy is projected to be mildly contractionary from 2011.

How Much Fiscal Consolidation? In his policy assessment Bollard said higher bank funding costs are helping to reduce economic stimulus. Then he used those words again. “Fiscal consolidation” will help reduce the work monetary policy might otherwise need to do. But this is as strong as the MPS gets in advising English on fiscal policy. How much fiscal consolidating will make Bollard happy is a moot point.

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