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New Zealand set for a prolonged fiscal tightening

The half-yearly Economic and Fiscal Update published overnight in New Zealand makes it clear that the May Budget will be a tough affair even though 2011 will be an election year. It is essential that fiscal policy is kept tight and prudent in the years ahead given that the external deficit will balloon once domestic private sector demand recovers. A debt downgrade, and higher bond yields, would be inevitable next year if New Zealand fails to deliver.

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