Labour to announce mini-Budget in December

3 NEWS: Prime minister Helen Clark says a Labour government would present a mini-budget in December to deal with the effects of the international financial crisis.

"It's obviously affected the kind of policies we are going into the election with," she said today.

"We're not looking to cut overall government spending but we have to look very carefully where we direct it."

Miss Clark said the Government was assuming the international crisis would have a prolonged effect on economic growth.

The Government announced yesterday it was introducing a $150 billion bank deposit guarantee scheme, but said it has total confidence in New Zealand's banking sector.

Finance Minister Michael Cullen said today the Government did not expect the $150b contingency liability to be called on and he had introduced the guarantee it to avert a possible risk.

"There was the risk that if we were the only country that is not offering a guarantee...people might start transferring funds into Australian-based operations," he said on Radio New Zealand.

"Obviously, in the current international circumstances people may have concerns and their reactions could create a problem that otherwise would not exist."

The opt-in scheme, which was announced along with a similar move in Australia, aimed to ensure continued confidence among depositors amid a freeze on international credit that is chilling the world economy.

The International Monetary Fund has warned of a meltdown in the global financial system, and many other countries have already moved to protect their banks.

Dr Cullen, who is using his powers under the Public Finance Act to introduce the opt-in scheme, said he did not believe the taxpayer was at risk.

The scheme, initially for a two-year term, will cover all retail deposits of participating New Zealand-registered banks, and retail deposits by locals in non-bank deposit-taking entities such as building societies and credit unions.

The scheme will be free for institutions with total retail deposits under $5b.

A fee of 10 basis points per annum will be charged on total deposits above $5b. This means that a bank with $20b in retail deposits would pay $15 million in fees per annum.

Australia's move to offer an even broader guarantee would have left New Zealand as one of the few countries in the world without such a policy in place.

"The deposit guarantee is designed to give assurance to New Zealand depositors. The New Zealand banking system remains sound. We want to ensure that ordinary New Zealanders feel that their deposits are safe in the current uncertain international financial market conditions," Dr Cullen said.

The guarantee was offered because Dr Cullen said he would not be comfortable with New Zealand being the only country not offering such a policy.

The contingent liability would go down in the books at $150b: "Not one I expect to be called upon because the institutions are extremely sound," Dr Cullen said.

Most of the banking sector cash assets are made up of wholesale banking deposits.

KPMG deputy chairman Godfrey Boyce said the move was consistent with what was happening overseas, but it was a significant change to the established thinking in New Zealand.

"It's definitely a ground shift move, but it reflects the extraordinary times we're in I guess," he said.

The decision was somewhat inevitable with every western country seeking to look after its own deposit base.

"You start to look as though you're out to one side just by the mere fact you don't act and move with everyone else. I think there was peer pressure," Mr Boyce said.

In New Zealand, finance sector woes had centred on property-related finance companies and funds, and retail investors had not really been affected.

Mr Boyce said he believed bigger banks would raise questions about how different-sized banks were treated under the scheme.

"Basically you don't pay anything if you've got a retail pocket base of $5 billion or less, and then if you're ANZ, BNZ, Westpac or ASB you pay essentially a guaranteed fee over $5 billion," Mr Boyce said.

"It seems a little bit of an inequity sitting in there somewhere, which I think the big four will reflect on."

National Leader John Key yesterday welcomed the move.

He called it an "inevitable and sensible step" considering international moves. However, he agreed that New Zealand's banking system continued to be sound.