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New Zealand’s Fragile State and the Need for Fiscal Prudence

(Bloomberg) — In a major speech, Prime Minister Christopher Luxon emphasized that New Zealand is currently in a ÔÇ£fragileÔÇØ state and urged the necessity of putting its public finances in order as a pre-requisite to building a stronger economy.

Government spending has surged by 84% since 2017, and the country’s debt has skyrocketed from NZ$5 billion ($3 billion) to a ÔÇ£staggering projection of well over NZ$100 billion,ÔÇØ Luxon stated in his first state of the nation address since assuming office. He candidly admitted, ÔÇ£I have to level with you New Zealand and say ÔÇö the state of the nation is fragile.”

The Prime Minister emphasized the NZ$7 billion of savings delivered by Finance Minister Nicola Willis in a recent mini-budget, suggesting that there are more cost-cutting measures to come in the future.

As the coalition government promises to address the cost-of-living crisis and aims to refocus the central bank on price stability, it recognizes that a stringent fiscal policy is crucial for achieving these goals. It believes that such measures will enable the Reserve Bank to tackle inflation and lower borrowing costs.

ÔÇ£Strong public finances arenÔÇÖt enough, of course, to deliver a strong economy in their own right ÔÇö but they are a critical pre-requisite,ÔÇØ Luxon emphasized. ÔÇ£We canÔÇÖt build infrastructure if we canÔÇÖt be trusted to borrow money.”

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Addressing Welfare Reform and Long-Term Benefits

Luxon also addressed the pressing issue of welfare reform, noting a growing number of New Zealanders on long-term benefits. He acknowledged that addressing this issue might not be popular with everyone but deemed it necessary for the country’s economic well-being. ÔÇ£More spending, more borrowing, and more taxes isnÔÇÖt a pathway to prosperity, itÔÇÖs a recipe for more of what weÔÇÖve seen from the last few years. Rampant inflation, higher interest rates, and an economy going nowhere fast,ÔÇØ he warned.

The speech, punctuated by applause, sought to establish a political narrative for the government’s first year in office and laid out ambitious plans for early and decisive action to tackle pressing economic challenges.

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