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Sobering words from the Reserve Bank

Hon Michael Cullen
Minister of Finance

15 September 2005 Media Statement

Sobering words from the Reserve Bank

“The Reserve Bank’s warning that further interest rate rises may be necessary to protect the Bank’s price stability target should weigh with voters as they consider their options on Saturday, ” Finance Minister Michael Cullen said today.

“The Bank identifies two principal uncertainties: oil prices and fiscal policy post-election. Under both scenarios, Labour offers the more secure future,” Dr Cullen said.

“A Labour led government would spend less than a National led government, due primarily to National’s $9 billion plus tax cuts.

“Comparisons on the stimulus injected into the economy through either increased government spending or lower taxes show the fiscal impulse under National would be higher, especially in 2006 and 2007 when it is calculated to be 1.5 per cent and 1.4 per cent of GDP compared with 1.2 per cent each year under Labour.

“These differences may seem small but they have a large and ongoing impact on the fiscal position and large impacts on domestic demand and therefore, potentially, on prices.

“We have said throughout the campaign that New Zealanders would pay for National’s tax cuts through higher mortgage and interest rates and today’s statement from the Bank bears that out.

“Similarly with oil prices. The effect of National’s cynical 6 month cut to the excise tax will be to blunt the incentive on motorists to reduce their petrol consumption with the result that the inflationary pressures will be higher when the cut is reversed on 1 April,” Dr Cullen said.

“On both fronts, National’s policies are aimed at securing a temporary political advantage regardless of the economic risks over the longer term.”

ENDS

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