Tax reform and fiscal restraint key, says Bollard
Tax reform and fiscal restraint would help monetary policy, says Bollard
by Jonathan Underhill
Dec. 10 (BusinessWire) – Reserve Bank Governor Alan Bollard singled out tax reform as a way to increase the effectiveness on monetary policy over the economic cycle while encouraging savings rather than property investment.
“The current system exacerbates the economic cycle through its impact on saving and investment, particularly the way it encourages demand for housing,” Bollard said in the December Monetary Policy Statement. Options include “removing or offsetting the current favourable treatment of property and housing.”
Bollard said the work of various government advisory
groups – the Tax Working Group, Capital Markets
Development Taskforce and the 2025 Taskforce are likely to
underline the linkages between monetary, fiscal and tax
policy. Any policy action taken in response to the work of
these groups, together with the government’s budget
decisions, “will affect how hard monetary policy has to
work to achieve price stability and potentially where the
burden of adjustment falls.”
Like developed
economies worldwide, New Zealand is benefiting from fiscal
stimulus as well as a central bank interest rate policy that
is keeping interest rates as low as possible. Bollard said
once the economy’s recovery is assured, “fiscal
consolidation would help reduce the work that monetary
policy might otherwise need to do.”
The central
bank is careful not to second guess government spending
plans, avoiding the pitfalls of being seen to question its
political masters. Its fiscal projections are based on
Budget 2009, though they have been updated for recent tax
outturns and adjusted to reflect the bank’s updated
macroeconomic outlook.
“Despite improved prospects
for economic activity since Budget 2009, tax revenue has
been weak, particularly in taxation on corporate and
entrepreneurial income,” Bollard said. “We assume this
weakness will persist, contributing to fiscal deficits over
the projection.”
He said government spending is
projected to rise further as a ratio of real gross domestic
product “in the near term,” before easing in 2011.
“This easing is expected to see fiscal policy move to
a broadly neutral stance later in the projection,” he
said.
(BusinessWire) 09:35:07