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Govt needs inflation and growth options

Canterbury Manufacturers’ Association

7 December 2006.

Govt needs inflation and growth options other than the OCR.

The Canterbury Manufacturers’ Association says that despite being left on hold, the Official Cash Rate (OCR) is largely an ineffectual tool for controlling New Zealand's inflation problem but it is highly effective in stifling any export-led growth.

Chief Executive John Walley says that the latest data shows New Zealanders are still spending heavily on imported goods; a trend that will increase especially as the Christmas period approaches. “New Zealand’s economic momentum is being funded by household spending, rising property prices, debt and of course ever more government spending”, says Mr. Walley. “Mobile phones were the largest single contributor to imported electrical equipment during October. What is that telling us about the direction in which the economy is heading?”

The Association questions how long the Government is prepared to wait before initiating policies that will really support the tradable sector long term.

“Reliance on the OCR to curb inflation and stabilise economic growth is fine if New Zealand is to maintain its status quo and bump along as a ‘commodity economy’, but this is not a first world approach”, says Mr. Walley.

While acknowledging that Capital Gains Tax, ‘Stamp Duty’ or even credit controls are a political graveyard in New Zealand, Mr. Walley says that the solution for the Government could lie in stiffening existing tax regulations around property – the major driver of inflation that seems to ignore pressure from the OCR. Another possibility could be inflation-linked taxes that target specific areas of the economy at the relevant times and does not crush the will of exporter to export as the OCR continues to do.

“There are different possibilities open for generating growth in the exporting sector and cooling inflationary pressures. Calls to increase labour productivity, waiting for the Kiwi dollar and consumer spending levels to fall and yet another flash in the pan ‘this year is Export Year’ scheme will not fix the problem of an unbalanced economy or relieve the burden this is placing on the productive and exporting sectors”, says Mr. Walley. “In lieu of a capital gains tax, maybe the Government should consider other mechanisms to influence inflation along with support for local companies to develop their products, process and staff.

Dr. Bollard says that he is concerned about greater inflation but tax cuts by the Government should be targeted at consumers and not producers will simple add to that inflationary pressure. Change requires more leadership less vote chasing behaviour”.

For further inquiries contact David Miller at the Canterbury Manufacturers’ Association on 03 353 2544 or david@cma.org.nz

ENDS

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