Top Scoops

Book Reviews | Gordon Campbell | Scoop News | Wellington Scoop | Community Scoop | Search

 

Needed: Tax Cuts But Not National's Other Policies

Needed: Tax Cuts But Not National's Other Policies


by Keith Rankin
16 September 2005

Tomorrow's election feels like 1975, 1987 and 1996. The common thread for these three was the economic recession that followed. In each case the macroeconomic situation was critical, but not correctly understood. In 1975, 1987 and 1996 New Zealand had a seriously overvalued exchange rate. Our dollar is even more overvalued this time. In all three elections, economic growth had been high, but was looking increasingly fragile.

Economic conditions in New Zealand will be significantly worse than the OECD average over the next three years, especially if we follow the Cullen/Bollard line of macroeconomic policies. Superficially, with highish growth, lowish unemployment and record current account deficits, the country's economy is overheated and in need of a bit of slowing down.

The slowdown has already begun, however. Tax cuts are needed to pull us out of a contractionary phase of the business cycle. We need tax cuts because the forecast growth rates are down. It's not whether we can afford them. We cannot afford to not have them.

Further, we need some sort of return – an individual growth dividend - for our past 15-years' efforts or else too many of us will become seriously disillusioned. Targeted tax relief accompanied by high effective marginal tax rates just doesn't cut it.

Fiscal policy has been contractionary for most of Michael Cullen's tenure as Finance Minister. 2006 is just the correct time for that stance to give way, in favour of an expansionary policy. Countercyclical fiscal policy can only work if we anticipate business cycle turning points. A reactive fiscal policy simply increases economic volatility.

The scariest feature of New Zealand's macroeconomic situation is it's huge $10 billion current account deficit. Yet, despite that, and despite the fact that September/October is a time of the year that exports are weak and imports strong, our high dollar is back on the rise. The principal culprit is our interest rates that are intended by the Reserve Bank to be clearly above those of our trading partners. Spending on property fuelled by foreign capital inflows needs to be replaced by spending on New Zealand made goods and services fuelled by tax cuts and wage increases. We must significantly reduce the import component of our spending.

In 2006, we need to maintain a strong aggregate demand in the face of what threatens to be a marked decline in private sector investment spending.

A reintroduction of import controls (as happened to good effect just after the 1938 and 1957 elections) is not on the agenda. Rationing imports by expenditure retrenchment would be a recipe for a huge and sudden rise in unemployment in both the tradeable and non-tradeable sectors. No, the exchange rate must be guided downwards, and with that we must accept adjustment inflation rates in excess of three percent.

Sadly, yesterday's monetary policy statement shows that the Reserve Bank continues to be out of touch. Policy settings are completely inappropriate for an open, exchange-rate-driven, economy. The Reserve Bank firmly rules out any reductions in interest rates in the foreseeable future. That means our dollar will crash when foreign investors' expectations change.

Our dollar should come down through a slow and steady process of interest rate cuts. Instead, interest rates will be raised further to prevent an "inflationary" depreciation of the kiwi dollar. The current account will get worse before it gets better, as our tradeable sector even now is being hung out to dry.

What is a kiwi voter to do? Tax cuts are necessary to avert a particularly nasty NZ-only recession. (The world economy is not on the edge of a crisis. The New Zealand economy is.) Yet I have no confidence that a National-led government will rewrite its Policy Targets Agreement to allow for the 5-6% inflation that we must have if we are to avert a self-inflicted recession of the type we had in 1977 and 1988 (and to a lesser extent, 1998, when Australia, Britain and America kept clear of the Asian recession). However, to vote for National's tax cuts, I am also expected to vote for a number of other National policies that I do not agree with, such as a pakeha-imposed abolition of Maori electorates.

Don Brash, in his interview with Kim Hill on 14 September, said that if National gets a substantial share (45% ?) of party vote it will have a mandate to remove the Maori seats. Baloney. Bollocks. Testicles. Dr Brash is quite disingenuous. He knows that a vote for National will be a vote for tax cuts. He knows that there are many, like me, who want tax cuts but not the rest of the package.

What does a voter do who wants the tax cuts but wants the Maori seats retained or subject to referendum or subject to Maori consultation or subject to a 75% support of Parliament? Thank God we have MMP, so we can vote for some insurance. The answer has emerged in the form, once again, of United-Future. If they get enough votes, they can allow a National-led government to quietly, and without loss of face, put to one side its divisive policies that deny Maori a special status in this land of the long white cloud.

If we get a Labour-led government, I fear we will experience a severe economic recession driven by a fall in consumer and business confidence, by a falling dollar, and by interest-rates being raised precisely when they should be coming down. The best way to avert recession is through tax cuts and a cut in interest rates prior to an externally generated currency depreciation. If the depreciation is seen internationally to be a result of falling interest rates, then it will be orderly and will facilitate a revival of our tradeable sector.

This better macroeconomic outcome is more likely under a National-led Government. But please, not a majority National Government.

*************

keithrankin @ woosh.co.nz

© Scoop Media

 
 
 
Top Scoops Headlines

 

Binoy Kampmark: Predictable Monstrosities: Priti Patel Approves Assange’s Extradition
The only shock about the UK Home Secretary’s decision regarding Julian Assange was that it did not come sooner. In April, Chief Magistrate Senior District Judge Paul Goldspring expressed the view that he was “duty-bound” to send the case to Priti Patel to decide on whether to extradite the WikiLeaks founder to the United States to face 18 charges, 17 grafted from the US Espionage Act of 1917... More>>

Digitl: Are we happy living in Handy's Age of Unreason?
In 1989 Charles Handy wrote The Age of Unreason. It's a book that looked forward to a time where telecommuting would be an everyday reality. We live in that world today, although we use the term working from home. The book contains other predictions that were on the money... More>>


Reactionary Succession: Peter Dutton, Australia’s New Opposition Leader
The devastation wrought on Australia’s Coalition government on May 21 by the electorate had a stunning, cleansing effect. Previously inconceivable scenarios were played out in safe, Liberal-held seats that had, for decades, seen few, if any challenges, from an alternative political force. But the survival of one figure would have proved troubling, not only to the new Labor government, but to many Liberal colleagues lamenting the ruins. The pugilists and head knockers, however, would have felt some relief. Amidst the bloodletting, hope... More>>


Digitl: Infrastructure Commission wants digital strategy
Earlier this month Te Waihanga, New Zealand’s infrastructure commission, tabled its first Infrastructure Strategy: Rautaki Hanganga o Aotearoa. Te Waihanga describes its document as a road map for a thriving New Zealand... More>>


Binoy Kampmark: Leaking For Roe V Wade
The US Supreme Court Chief Justice was furious. For the first time in history, the raw judicial process of one of the most powerful, and opaque arms of government, had been exposed via media – at least in preliminary form. It resembled, in no negligible way, the publication by WikiLeaks of various drafts of the Trans-Pacific Partnership... More>>




The Conversation: Cheaper food comes with other costs – why cutting GST isn't the answer

As New Zealand considers the removal of the goods and services tax (GST) from food to reduce costs for low income households, advocates need to consider the impact cheap food has on the environment and whether there are better options to help struggling families... More>>