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28
July 2007
Accepting
Accountability
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In a week
when lies in Parliament led to the unceremonious departure of
Labour’s 10th Government Minister, another
statement made during Question Time deserves closer scrutiny.
In particular, in answer to a question on the Reserve Bank,
Finance Minister Michael Cullen stated, “a large tax cut,
feeding further demand into the economy, would clearly place
further inflationary pressure into the economy, thereby
leading to even tighter monetary policy.”
The
question of whether that statement is correct is an important
one for New Zealand since it epitomises the ideology that
drives the Labour Party’s management – or mismanagement -
of our economy.
Since being
elected to government, Labour has used a variety of excuses to
claim that the country cannot afford tax cuts.
Usually those excuses hinge around the fallacy that tax
cuts would mean that people like nurses, teachers, and the
police could not be paid.
That, of
course, is utter rubbish. The programmes targeted through tax
cut policies are not those that provide core services. Rather,
they are those that are ill advised or would be better carried
out by the private sector.
Such
ill-advised expenditure would surely include the $652 million
purchase of 105 LAV3s, the armoured personnel carriers that
can’t be used by our troops in action, because they are too
big to be transported out of the country! Another would be the
$20 million on-going cost of storing and maintaining the
Skyhawks and Aermacchi planes that Labour are left with after
foolishly deciding to disband our Airforce.
What about
the wisdom of funding a second Maori language TV channel or
holding educational training courses in prostitution? And why
does the government run ACC, when the private sector did it
more efficiently and better?
Another
burning question is why a small country like ours needs
another 15,000 public servants? Are they the reason that so
many questionable new laws and regulations - such as the
proposed new air quality standards - are being introduced?
These new air quality standards will not only force a wider
ban on the use of fires for home heating, but it has been
estimated that the proposed restrictions on emission controls
on cars will cut the importation of used cars into New Zealand
by up to two-thirds!
Or what
about the new regulations on “biosprospecting” that are
being proposed by the Ministry of Economic Development (MED)?
This new regulatory regime is being set up in anticipation of
Maori being given the rights to all of New Zealand’s
indigenous flora and fauna by the Waitangi Tribunal. While
many thought the flora and fauna claim would be laughed out of
court, the government clearly believes that it will succeed
and are busy setting up new systems to deal with it. If you
would like to have your say on Bioprospecting, visit the
Government Consultation page of the NZCPR.com website and
click on MED with a view to sending in a submission before
October 12th.
Returning
to the question of whether or not tax cuts are inflationary,
we need to examine the fundamental causes of inflation.
Inflation occurs when the supply of money grows faster than
the supply of goods and services. This results in too much
money chasing too few goods and services, causing prices to
rise across the board.
The prices
of goods and services sampled from fifteen different locations
around the country are collected on a three-monthly basis and
used to calculate the Consumer Price Index (CPI), which is the
official measure of inflation. These goods and services are
sourced from the tradable sector where there is plenty of
competition, and the non-tradable sector where there is none.
It is the
role of the Reserve Bank to maintain price stability in the
economy by keeping the CPI under 3%. To do this it uses the
Official Cash rate (OCR) to tighten money supply through
higher interest rates, or to loosen it through lower.
When Labour
became the government in 1999, they inherited a CPI of 0.5%
and an OCR of 4.5%. As at June 2007, the CPI was 20% higher
than it was in June 2000. The Reserve Bank has now pushed the
OCR to 8.25% - giving New Zealand the dubious honour of having
one of the highest interest rates in the western world – and
the currency markets responded with the kiwi peaking at over
US81 cents, the highest level in 25 years, before falling
back.
In order to
better understand the complex forces behind the rise and fall
of the kiwi, I asked the NZCPR Guest Commentator, Dr Roger
Bowden, Professor of Economics and Finance at Victoria
University to explain the dynamics. In his article “The NZ
dollar: End game or a new game altogether”, he describes how
Japanese housewives fund the mortgages of NZ homeowners:
“Most of our housing mortgages are funded by Japanese
housewives who invest in uridashis, which are NZD denominated
bonds. Foreign banks and corporations like to issue such bonds
into the Japanese market because the housewives do like the
high coupons that they carry. After all if you can get 7% on a
NZD uridashi and 1% on an equivalent yen bond, it looks like a
bit of a no-brainer”… to read the article click
>>>
The Reserve
Bank has copped a fair bit of flak for its recent performance
including its futile visit to Japan to try to discourage
investment in the kiwi, its costly intervention in the foreign
exchange markets, and - most importantly - its failure to lay
the lion’s share of the blame for driving up inflation on
the Labour Government’s big-spending habits.
Since 1999, government spending has
increased by a massive $21 billion. As a result, the
non-tradable part of the economy, which is made up of the
activities of central government and local government, has
consistently produced annual inflation of around 4%. In
comparison, inflation in the competitive parts of the economy,
which includes retail, has been tracking closer to 1%.
In their submission to the Parliamentary
Inquiry into the Future Monetary Policy Framework, the New
Zealand Business Roundtable identifies those factors which
contribute to inflation. In particular they mention the
flow-on effect of high taxes in reducing productivity, which
has now slumped by two-thirds since 2000. They estimate that
if annual productivity growth had been just 0.2% higher, the
increased level of goods and services in the economy would
have kept inflation down, interest rates would be at least 50
basis points lower and the exchange rate “well south” of
US70 cents.
Other inflationary factors they identify
include the increases in labour market regulation;
cost-raising regulations in areas such as ACC,
telecommunications, electricity and banking; cost increases
caused by the Resource Management Act, the Building Act, and
council restrictions on land supply for housing; and the
failure to press on with essential reforms in areas of
infrastructure such as roading and water.
In addition, they mention the growth in
local council spending and the increases in rates, fees and
charges as a result of the Local Government Act 2002, which
encouraged to local authorities to dramatically expand their
roles and functions.
[However, concerns about the cost increases and poor services provided by
local government are not specific to New Zealand. These same
concerns were responsible in 2005 for driving the residents of
Sandy Springs in the US State of Georgia to overwhelmingly
support a referendum – 96% to 4% - in favour of privatising
their city. Now run by just four employees, this city of
90,000 contracts out all of its services, except fire and
police, with residents being delighted with the fall in costs
and the rise in efficiency with which their services are
provided. (More
>>>)]
Finally, having identified the factors that
cause inflation as being largely the responsibility of the
Labour Government, the submission describes the factors that
do not cause
inflation. These include the saving or spending habits of New
Zealanders, house prices, the lending policies of banks, and
tax cuts. (To read the submission, click
here >>>).
The reason that tax cuts are not inflationary is that tax in the hands of
government is spent - and maybe even wasted - but that same
money given back as tax cuts will be saved, used to reduce
debt, invested to improve productivity, and generally used to
improve the lives of those who earned it.
Clearly Labour has driven up inflation with its profligate spending and
is itself largely responsible for most of the pain that our
high dollar has caused. Isn’t it time that this government
accepted accountability?
The poll this week asks: Would you like to see the Reserve Bank take
the government to task for excessive government spending? Go
to Poll >>>
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