The balance between a country's exports and imports of goods and services is known as its trade balance. This balance, combined with the balance of inward and outward investment income and other current transfers, makes up its current account surplus or deficit.

New Zealand's current account deficit grew to record levels in the September quarter. Statistics New Zealand said the deficit came to a seasonally adjusted $3.09 billion in the three months to September, the largest quarterly figure since records began in 1987. The annualised deficit for the 12 months to September was $8.25 billion, also a record. Government statistician Brian Pink said the current account deficit represented 5.8 percent of gross domestic product, up from 4.8 percent in the same period in 2003. "The increase in the deficit was due to a fall in goods exports, combined with an increase in income earned from foreign investment in New Zealand", Pink said in a statement.

Some observers assume that the current account deficit is a cause for alarm and government intervention. This is incorrect. A greater cause for concern is that such primitive economic commentary is widespread.

Neither current account surpluses nor deficits should be seen as particularly good or bad in themselves. Consider the imbalance of payments between the North and South Islands. Such an imbalance surely exists, yet nobody really knows or cares what it looks like. There are no claims that the accumulated stock of assets and liabilities is harming people in either island, and there are no calls for the government to ‘fix the problem'.

The story is no different when it comes to trade and payments between New Zealand and other countries. As the chairman of the economics department at George Mason University Donald Boudreaux recently said, “Classifying the world's producers and consumers according to the issuer of their passports creates an illusion of relevance out of an utterly irrelevant happenstance.”

Arriving at a particular current account balance should not be the object or ultimate goal of public policy. There could be a genuine cause for apprehension if the government were distorting the situation by running large budget deficits, or if it were involved in net foreign borrowing. However, neither is the case at present.

An Asian-style financial melt-down is sometimes presented as a doomsday result of prolonged current account deficits. This has little relevance to the New Zealand context. One reason is that most Asian countries had fixed exchange rates, determined by governments rather than market participants. Another is that the New Zealand banking system is much stronger than that of Asia before that region's bust. There is no evidence banks have left themselves open to significant exposure on money lent in New Zealand.

Debt to foreigners is created when commercial transactions involve borrowing from abroad. Therefore the current account deficit reflects the enthusiasm foreigners have for investing in New Zealand, and their confidence in our economy. To the extent that investor confidence drives the deficit, it should cause no concern. Opportunities for mutually advantageous trade and investment are what matter, and the greater the number of such opportunities, the better. Lenders to New Zealand are not naïve. They judge their exposure. If they become concerned, they will mark up the interest on loans, or mark down the New Zealand dollar.

Ill-informed arm-waving about the current account deficit raises the spectre of solutions to problems that do not exist. Because the current account deficit also represents the difference between domestic savings and investment, arguments become louder for the government to intervene to force up savings. The latest suggestion is compulsory workplace superannuation. There is no principled reason to switch to a compulsory system, and there is no evidence that voluntary arrangements are failing. The most exhaustive attempt to assemble evidence on New Zealand's savings level and trends was contained in a 2002 paper by Treasury officials who concluded that, after making adjustments for inflation, there has been no apparent downward trend in the level of private savings in New Zealand. They also found national saving rates could be much higher than suggested by conventional measures. The vast majority of New Zealanders make sensible decisions about what they will spend today and what they will put aside for spending tomorrow.

Another unfortunate side-effect of excited rhetoric about the current account deficit is that it distracts attention from the areas where New Zealand really should be striving for improvement. For several years this country has slipped in global competitiveness surveys. While our performance continues to be relatively strong – a testament to the forward-looking reforms of the 1980s and early 1990s – other countries are doing better.

It is almost 10 years since New Zealand's index rating peaked in the Economic Freedom of the World Annual Report, co-published locally by the New Zealand Business Roundtable. Factors behind our slide include increased government spending (which pushes up domestic costs and prices and hurts exporters), anti-growth measures such as the changes to the Employment Relations Act and the 2004 budget redistributive spending plans, and increased regulatory costs. These are matters that New Zealand's policy makers should be focused on – not the status of the current external balance.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

David Young
Communications Manager
Ph: 04 499 0790
Email: dyoung@nzbr.org.nz

Web: www.nzbr.org.nz