Matt Nolan

RBNZ on “sustainable” growth

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So on the 14th of July Alan Bollard said the follow in a speech to the Hawke’s Bay Chamber of Commerce:

Sustainable recovery, with rebalancing in demand and the economy’s productive base, is mostly a microeconomic matter. This means households, firms, banks and investors making the right decisions about where to allocate land, labour, capital and funding.

I agree, any issues with the sustainability of growth (read the composition of growth relative to the fundamentals of the economy) depends on the incentives provided to the individual agents in the economy.  If there are issues with the incentives we should ask, “where is the market/government failure here”.

Then on the 30th of July the OCR Review had this in it:

The level of the dollar in particular, is not helping the sustainability of future growth, and brings with it additional economic risks

A higher dollar will lead to lower GDP growth yes.  A higher dollar change the relative price of importing vs producing, leading to more importing yes.  A higher dollar promotes consumption and debt, yes.

BUT, the higher dollar may be the result of rising prices for our goods, or a stronger growth outlook, in which case complaining about it makes no sense.

Furthermore, even if it doesn’t seem justifiable we should recognise that it is a symptom of the imbalances, not the fundamental cause.  If our dollar is “too high” we need to ask what fundamental incentives are out of whack – what policy errors have been made, what institutions are causing problems.

For the RBNZ the dollar is about monetary conditions – if they think monetary conditions are too tight, cut the interest rate to promote consumption now.  Cutting the interest rate because of concerns about the sustainability of future growth makes no sense.  The sustainability issue is not a monetary policy issue.

Matt Nolan

No tax cuts?

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So Bill English has said there is now no room for tax cuts, specificially:

New Zealand had to get out of the tax-cut “mode” it had been in for the past five years, he said, because of the new economic conditions, which see budget deficit forecasts of up $12 billion for the next 10 years.

So since not cutting taxes in the face of inflation is actually “increasing real taxes” Bill English is saying we need to get rid of the Budget deficit by gradually increasing taxes.

There is another way – cut real spending. If New Zealanders are in “tax-cut mode” because they think real spending is too high, and would rather have a government that is a smaller share of GDP, then we should cut taxes and actually do something about spending.

Mr English is attempting to soften the ground for what could be some radical ideas emerging in the next few months from the comprehensive tax review being undertaken by leading tax experts.

I am glad to see that they are looking at ways to improve the tax system. But this is only part of what needs to be looked at. I know that we are being told they are cutting spending, but I’m not sure if there is much more scope for cutting morning teas to public servants.

We need to look at the hard issues (namely: Working for families, interest free student loans, our high level of infrastructure spending) and then we need to ask, is this what we should be spending societies effort and production on?

Note:  To be fair I have a lot of respect for the fact that Bill English admitted the limits on tax cuts and spending.  That sort of transparency is an important part of good government, so it is awesome to see.