Deficit impact explained

Press, 9 May 1985, Page 4

Deficit impact explained

By

MICHAEL HANNAH

in Wellington

Ironically, the rise in the deficit had less impact on the Government’s borrowing programme than figures might at first suggest. Treasury and Reserve Bank sources yesterday explained that the payment on realised exchange losses would have amounted to an injection of Government money into the economy, which would have to be taken into account in its debt sales programmes through stock tenders.

The payment on expected exchange losses, however, would not have added to the money supply (and therefore the debt sales programme) as they are “paper” losses. The “loss” in this case is the difference in the book value of overseas reserves arising from the devaluation and subsequent movement against other currencies, particularly the United States dollar.

The prepayment of this “loss” is made as a book entry by the Treasury to the Reserve Bank, in anticipa-

tion of the actual exchange loss when the reserves are converted. Should a loss be made in future on these reserves, some of that loss will have already been accounted for in last year’s Budget, and so the effect of exchange losses on future Budget deficits, barring big currency movements in the meantime, will be reduced.

Presumably, should exchange gains be made in future on these reserves, future Budgets will look that much better.