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Focus Quickly On What You Can Change

24 November 2005

Message To Government – Focus Quickly On What You Can Change

Instead of killing business confidence by threatening controls against the housing market, plus having the prospect of interest rate hikes, Government should take action to control inflation in its own sector, Auckland Chamber of Commerce CEO Michael Barnett suggested today.

With Government spending contributing about half of the current 3.4% inflation rate - the highest level since 2000 and breaking the Reserve Bank’s 3% benchmark – three things it could do immediately to restrain inflation expectations are:

- Put a freeze on new Government charges and levies and block increases in existing ones and focus on improved productivity;

- Have local governments agree to not raising rates and charges beyond the Reserve Bank’s 3% inflation guideline (also focussing on improved productivity) and,

- Take steps to eliminate Government profiteering from the increased tax revenue generated from rising petrol prices.

Given that the Reserve Bank has confirmed that the rise in inflation is being driven by three main drivers - rising petrol prices, higher house construction costs and increased Government charges - it is logical to expect Government to take some strong action in the area it has direct control over, said Mr Barnett.

On two fronts at least, there is some justification for cautious confidence:

- Petrol prices have eased back a few cents in recent weeks; and,
- Housing demand will likely be checked by the fact that immigration in the year to October is some 65% lower than in the year to October 2004.
Business confidence will also be reassured by Minister of Finance Michael Cullen’s confirmation this week that the officials’ review of options to help the Reserve Bank fight inflation was not intended to find ways to clobber the housing market.

“But what is good for business should be good for Government, which is about 40% of the economy,” he noted.

“I suggest threats against business need to be balanced with action by Government to put its own house in order. To be consistent, local authorities, for example, should be threatened with legislation to stop rate increases above the Reserve Bank’s 3% guideline.”

Mr Barnett said that despite the drop in business confidence, the real economy is continuing to perform positively. “Unemployment is low, GDP growth in the June quarter was 1.1%, export prices remain respectable, and there is every sign that producers for both domestic and export markets are taking strong Christmas orders.”

“It seems that the drop in business confidence is being fuelled mainly by the policy threats emerging from the Reserve Bank and Government, and not the actual performance being turned in by most businesses,” he said.

“The last thing Government and the Reserve Bank should do is to turn the talk of reducing inflation into a collapse in business confidence that drives up the very recession they say they are seeking to prevent.”
The Chamber of Commerce has repeatedly called for a process to scrutinise Government charges, levies, rates and other regulations that impact on inflation before they are actioned.

“While each increase may be small, the cumulative impact of Government charges is a major and ongoing contributor to inflation. What grates with business is that this is an area impacting on inflation expectations that Government alone has the power to hit for six – it is time it did.”


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