There would be scope for a cut in the Official Cash Rate (OCR) if government were able get its spending under control, former Reserve Bank governor and former National Party leader Don Brash said.
In a speech to the Orewa branch of the National Party, which he is still a member of, Brash said interest rate cuts would help take pressure off the New Zealand dollar, which was at a level where it was holding back a rebalancing of the New Zealand economy, which was urgently needed.
Getting government spending under control was "absolutely crucial" because it would not only begin the process of scaling back the size of the public sector in New Zealand, "which is very much larger than the public sector in Australia – vital if we’re going to grow faster", but it would also enable monetary policy to be eased, Brash said.
"Interest rates in New Zealand are now much lower than they have been for most of our modern history, but they’re higher than in most other developed countries, and this has the highly undesirable effect of keeping our exchange rate at a level which is holding back the rebalancing of the economy which we so urgently need," Brash said.
"New Zealand now has a higher level of overseas indebtedness relative to the size of our economy than almost any other country in the developed world, but we continue to add to that indebtedness as year after year – indeed, every year since 1973 – we spend more on imports of goods and services than we earn from exports," he said.
"If the Government were to get its own spending under control, there would clearly be scope to cut interest rates – indeed, there would be a need to cut interest rates – and that would almost certainly produce some of the fall in the exchange rate which we so clearly need."
'It hasn't changed'
Government spending as a share of GDP was the same this year as it was when National took office two years ago, Brash said.
"Because the Government was not willing to reverse some of the seriously dopey policies introduced by the Labour Government during its final term in office – think interest-free student loans and universal child-care subsidies (policies which, incidentally, Bill English sometimes rather unkindly blames on me because of how close the 2005 election was!) – we’re now running a primary fiscal deficit larger than at any time in the last four decades," he said.
Most of that deficit was 'structural', and would not disappear when the economy resumed its normal growth rate, Brash said.
"Getting that deficit down will take tough, and potentially unpopular, decisions: unfortunately, it can’t be done simply by driving a bit of inefficiency out of the Wellington bureaucracy. So far, the Government has stated its intention to reduce the deficit, but has not announced any measures that will actually enable it to do so," he said.
'Corporate tax rate still too high'
In the speech, Brash also took aim at government asset ownership and what he thought was a still-too-high corporate tax rate.
"We urgently need to get the tax on business income down," Brash said. "The Government’s 2010 Budget announced a reduction in the corporate tax rate from 30% to 28% and that was a cause for modest celebration."
"But that reduction was offset by changes in depreciation and some other arrangements, so that the overall impact of the Budget is that the effective tax on companies was increased by about 1%, not reduced by 2%," he said.
National thinking of asset sales?
Brash said there needed to be an explanation to the public on why governments "did not make good long-term owners of businesses, and why we will therefore be selling at least those which operate in competitive markets".
Brash chaired the government-appointed 2025 Taskforce, set up under a confidence and supply agreement with the ACT Party to look at how New Zealand could match Australian incomes by 2025. See our story on its second report here.
He pointed to the second report saying the argument for privatisation was different today than it was in the 1980s.
"No longer are government trading operations grossly inefficient; nor is our government debt yet at dangerous levels. Rather, the argument for privatisation today is that, by selling SOEs into the private sector, we empower them to respond to the challenges and opportunities of the future in a way which is impossible while they remain in state ownership," Brash said. This from his speech notes:
As a Party, we need to be at the forefront of challenging why the state should be:
- The biggest owner of dairy farms in New Zealand;
- The biggest fund managers in New Zealand;
- The 50% owner of a large chain of petrol stations;
- By far the biggest owner of rental properties;
- The dominant generator of electricity;
- The dominant owner of our trains and planes;
- The owner of our most aggressively growing bank.
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"As a Party, we need to be at the forefront of challenging why the state should be:
• The biggest owner of dairy farms in New Zealand;
• The biggest fund managers in New Zealand;
• The 50% owner of a large chain of petrol stations;
• By far the biggest owner of rental properties;
• The dominant generator of electricity;
• The dominant owner of our trains and planes;
• The owner of our most aggressively growing bank."
Well Mr Brash, if the Government didn't own/control these, we would be paying Billions more each year to overseas owners
Brash has it wrong....the ocr should be raised and the sooner the better...the last thing the economy needs is more petrol tossed on the property ponzi scheme...Savings will go up with the rates increases and the overleveraged will be forced out from behind the banks...farm's will become affordable again. This foolish game of kicking the can down the road will end in disaster.
The rebalancing must come from greater savings that will result from families and farms not being milked by the banks.
Brash is right to call for govt to cut back the size of the state but you can bet he would not support an end to the Higher Salaries old boys Commission and the bloated salaries handed out to mps and senior state bosses. The rest of his blathering just repeats stuff said by others.
He is a banker.......!
".the last thing the economy needs is more petrol tossed on the property ponzi scheme"
I agree, but for people like me, with a mortgage, wife & kids, the last thing i need is high interest rates because someone down the road is borrowing mega-bucks to buy every-property they can get their hands on.
Maybe we need a two-tier system of deposit rates (as in Canada) & Interest rates?
Wolly I have been saying for years that the answer to the housing bubble was to drop interest rates, that is a dramatic drop. Then as the Carry Trade money disappears out of the country there will be no money to borrow. But maybe that is too simplistic.
I would like to see Bernard do a piece on the effects on our dollar when confidence is eventually lost in it. What is it, 17x GDP being traded? What happens when no one wants it anymore?
Cut back size of state... yer right Wolly, but what you and most mean is 'cut back on that which doesn't affect me'. Biggest State handout is National Super. Put your money where your mouth is and us younger ones will then take notice. And no need to bang on about house prices, most these days are dual income families, and based on 2 incomes, houses are not relatively more expensive than when people tried to do it on just the traditional breadwinner's income. And everything else like household appliances, cars, etc are relatively way cheaper than they used to be. But a cut-back in welfare entitlements like your national super is not going to happen because you guys won't want it to happen.
You poor young Muzza....I expect to collect my pension in just a few years...I'll be thinking of you every time the loot pops up in my account....then I'll shift it into an aussie gold miner in a flash....But you're too young to remember us old farts gave away 5 years of pension rights not that long ago...was 60 now 65.....now you want more...always more....
Wolly my friend...higher interest rates would help deflate the property ponzi...but it would also be a punch in the guts for our export sector, and an export led recovery is the best option...so I'm with Brash on this one - he's proposing a balanced economy, smaller govt, lower interest rates, raging export sector...If only Brash one that 2005 election - I wonder what where we would be???
Oh the export led recovery...yes I did hear something about that....where is it!
Brash is drumming the banker's books Ricardo...he is a banker to the bone.
Rates will rise anyway as the european piigsty breaks apart.
We will soon owe $250.ooo.ooo.ooo.oo Think what a modest rise in the cost of credit will do to Noddy...this is why S&P issued their warning. How many warnings do you need.
The last bloody thing this economy needs is yet more hot money being blown into the property ponzi schemes....Brash would love to to see just that!
Why doesnt he jsut joing ACT and be done with it....
Govn's dont make good long term owners, yeah right....yet the SOEs are in fine health and indeed the NZX dorks are drooling over the opportunity to list them....if they were bad value this wouldnt be the case. So Im sure they will at some stage be listed, then we will see the institutions race in, rape them of value, load them with debt to make quick profits and leave them for dead with mom and pop investors again wondering what hit them.
Its been done before....the voters hopefully will be wise enough this time to see it for what it is pillaging by the rich....
regards
So much pointing, so many fingers .....
Indeed, govt. debt needs resolution, BUT, BUT, BUT - what of the unrestrained growth and size of private debt that fuelled the toxic property ponzi bubble BECAUSE, the school of Don Brash FAILED to effectively restrain non-tradeables inflation by using FAILED monetary policy theory? The headline could read:
"Clear scope for OCR cuts if RBNZ grasped the nettle and used prudential tools more robustly - as they could EVEN UNDER the present form of the Act."
Sure, the likes of land supply constraints and gov.spend are part of the problem - but so is RBNZ's reliance on FAILED thinking in regard to executing monetary policy - the belief that OCR is a valid price signal, c'mon get real, it's not a valid signal. If it were why would the Governor need to RSI his jawbone so much, both on the way up and on the way down (pass through inertia issues)?
But do they give a toss? I don't think so and I doubt Don Brash would ever challege his former employer with the same gusto he does the other issues. Sure they kept headline in the band and could argue the financial system is stable. However with the degree of PRIVATE debt and toxic looking debt that has accrued, can they really expect us to believe we are at low risk of instability going forward? Err, let's ask S&P. Sure bag em' for being a ratings agency, but beware the complacency we've seen in the Ivory Towers about what S&P have said.
Standby for PIGSNZ.
Correction. I said, " ... I doubt Don Brash would ever challenge his former employer with the same gusto he does the other issues."
I should have remembered, he has at least indicated recognition that the OCR mechanism is a failure on it own, because it was Don Brash who suggested using variable fuel excise duty as a supplement to the OCR. I think there are better ways and agree with others that we should'nt have the RB engaged in setting taxes. However, why hasn't he continued on with his thinking to get a resolution on this issue, after all, he was the previous RB Governor and is well qualified for the task. Not just because of his previous role, but because at least he has recognised the FAILURE and demonstrated some WILL to correct the problem. Well, at least in times past. I wonder what's holding him back in this area?
See slide 13, here:
http://www.mea.org.nz/documents/734-presentation_by_dr_don_brash_t.pdf
Maybe, Roger, if he had won in 2005 we'd have had variable fuel excise duty pushing back against non-tradeables inflation - what do you think of that?
Cheers, Les.
Clarification. I said, " ... he has recognised the FAILURE ... " A matter of interpretation, because as you will see in that presentation for NZMEA the statement; NZ runs "world best practice" monetary policy. To which I reply, sure, just look at the world, don't you think we need to get better than best practice - especially for a small, open and export trade exposed economy?
Cheers, Les.
If Brash had won in 2005 , we'd be focused on going past Australia , not still vainly hoping to catch up . A small nimble country ought to leave the bigger economies behind , as Luxemburg , Switzerland , South Korea , and Singapore have done .
The variable fuel excise is an interesting proposal . Donny does have some tricks up his sleeve .
JK & Wild Bill are too thick to even understand the need to align the top personal income tax rate with the company and trust tax rate ................. Geeeeeeez , this National Government are a bunch of plonkers !
Varying fuel excise duty would deliver less lag than the OCR in terms of a signal, but like OCR it would create price inflation before throttling money supply inflation. Therefore I'd rather see something that is based on throttling money supply inflation as a supplement, as well as improving the lag problem in the OCR mechanism, that could be, ban or partially ban fixed rate loans, or allow the RB to vary the principal repayment rate on fixed rate loans (hedged agin market aberrations, but not RB's execution of monetary policy.)
However, the main point here is that Don Brash does indicate recognition of the problem, as for the solution that's another matter and means trading off functionality against political acceptability. I think it is this trade off that challenges politicians of Don B's ilk as much as it did Helen Clark and does now John Key - the MMP challenge in other words. The safe option seems to be consenual and poll driven management (I'll not malign the word leadership in this instance) while more direct (old?) styles previously associated with FPP don't work either, because it was this direct/old style that MMP was meant to moderate. So is MMP bad, or are our politcians lacking the appropriate skills to lead effective change in an MMP environment? I've come around to believing the latter.
So Roger, I think your'e right, we could actually surpass Auz, if we were led to. Considering one aspect of the overall problem - it's multi-causal. So, granted an efficient functional fix on any one of the following causes could be useful; I think these seem to be, land supply, immigration, taxation, public sector spending, monetary policy. Of course there are lobbies of support against change in any one of these areas, so my suggestion is make incremental, but significant, change in ALL to deliver appropriate change overall. To get there means selling the benefits clearly and showing the vested interests that it isn't just their particular interest that is shouldering the impact alone. Unless of course they are part of that small group of people that benefit from the status quo - that is, constrained land supply, unrestrained immigration, nil effective land/property/capital gains taxation and pro-cyclic monetary policy - who could that be, Roger? Does that group have so much power? Maybe they do, which is surprising in a one person, one vote democracy. Unless of course NZ suffers from a deliberate 'economic apartheid' and/or the same 'government capture' situation as the US - do we?
Cheers, Les.
Dr. Brash nails it when he says that National has kept the seriously dopey policies of Clark & Cullen . And that government spending as a % of the nation's GDP has not fallen . As excretiable as the former government was ........... what was the point in turfing them out , if the new lot have no balls to back an innovative plan .
Unlike Key , Don Brash opposed Clark & Cullen with a distinctly different agenda ........................ JK just got into power by saying " me too " , to all of Labour's seriously dopey policies . .............. We have some seriously dopey voters in NZ !
I wonder if we have problems like this in NZ:
" ....is a rare example of how Australia's independent central bank is prepared to act to protect its monetary policy decisions."
" .... clearly illustrating the hugely muddled thinking and behaviour within the RBA."
I wonder?
Les.
Right - sound solutions, here we go:
* Work out the carrying-capacity of both the planet, and New Zealand long-term.
* On the basis of that, establish a population cap, and a social regime to not exceed it.
* Establish the 'commons' which are permanently off-limits. (Conservation land, foreshore, coastal water, Queens chain etc.
* Divvy up the rest for best use. River-flats for arable farming, lower grade uplands for forestry, node-point clusters of housing (it's easier to distribute food/water/sewerage. (My betting is that the existing won't alter too much in that light).
*acknowledge the obligation to hand on the environment (our habitat ie everything) in 'as was' condition to the next generation (the running-down per-head, if not curtailed, is a short-term piece of chemistry).or why hase them?
*Open slather withing those limitations.
But of course, that would upset your little applecart, so we can't have that, can we? Don't blame Ian - he's got the same problem you have - you guys are just scrapping over who gets what part of the cake.
Some of us, standing back and perhaps getting a better perapective (and to be honest, without a reason to promulgate self-serving spin) are pointing out that the cake is finite.
Something you should give some thought.
Nothing like a new experience
PDK sounds to me like a stark raving mad neo Nazi "scientist" in a cheap sci-fi thriller.
"Population reduction"?
Bernard, do we have to put up with this stuff on your econ and finance blog?
".....establish a population cap, and a social regime to not exceed it."
"Social Regime"? Have you designed the uniforms, yet, Adolf?
This is for NZ, with its 4 million people on 300,000 sq kms? FFS? What do you plan to do about the population level on Bali? Have you got the nukes ready?
"Establish the 'commons' which are permanently off-limits. (Conservation land, foreshore, coastal water, Queens chain etc."
What about the separation of church and State? This is nothing but paganism. Creating "holies of holies" which infidels are not allowed to sully. There is nothing scientific, economic, or utlitarian about this.
".....Divvy up the rest for best use. River-flats for arable farming, lower grade uplands for forestry, node-point clusters of housing....."
Why would all this utopian nonsense turn out any different to when the Bolsheviks or Pol Pot did it? But of course, "population reduction" is not mere collateral damage with these people, it is part of the program.
(By the way, I like the "node point clusters of housing", I think we would have a lot more of that if people were free to live this way and developers were free to develop this way. But this is about the need for more freedom, not for more planning).
"......acknowledge the obligation to hand on the environment (our habitat ie everything) in 'as was' condition to the next generation"
Pure idiocy. If our grandparents had taken that attitude? Or any generation preceding? Ronald Reagan once commented that everyone he knew who was in favour of abortion, was fortunate enough themselves to have been already born. PDK's attitude is like this. He wouldn't KNOW anything (let alone CARE) about the environment, environmental indicators, potential health improvements, potential technology advancements, transport, communication, etc etc; had all progress been halted in the year 1500 by some mad religion. (I bet he rails against the Catholic Church obstructing progress for centuries too).
How much does a New Guinean highlands tribal culture know or care about the environment? PDK rails against the progress that has enabled him to live "sustainably" in relative comfort, because unfortunately most people have chosen to use that progress in "non sustainable" ways. But without FREEDOM, we wouldn't have the progress at all. We could never have developed all that technology had there always been tight constraints on its application, by an omnipotent totalitarian nomenklatura. Did the former USSR develop ANY technology in the direction of "sustainability", EVER, AT ALL, AT ANY TIME?
I am so depressed at the possibility that the Nazis and the Bolsheviks and their imitators were mere curtain-raisers for the apostate West's "final solution". I am sufficiently clear minded to see that "the cure" from the likes of PDK will be far worse than "the disease". Give me the free market any day, there would be a lot more survivors, a lot more problems solved via technological progress, and exponentially greater net human benefit. IF, indeed, there turned out to even BE a problem that technological progress did not in the event solve.
Forget about Brash....keep you eyes on 'our dear leader' and 'brilliant comrade' as they push war on the Korean pen.....days away now....triggering the second and worse global trade and financial collapse.....
The euro piigsty is looking more like a shithouse every week....the usa is rushing headlong into decline and the pages of history.
Noddy is at an economic dead end with a property bubble that has the full protection of the entire system of govt.....the peasants and the economy are being farmed by the banks....the banks control govt policy through the RBNZ and direct Beehive lobby influence.
It's every peasant for themselves....get out of debt if you can...otherwise reduce exposure....Do not borrow money...borrow the neighbours tools but stay away from the banks.
Ah well you can't be right all the time PDK....!
You must agree that staying out of debt is the best option for Kiwi families and small business.
You must also accept that the banks are sucking the wealth from the economy thanks to their mortgage stranglehold over so many families and small firms and farms....and that the bubbles are also holding rents at high levels...
Now how you could see cheaper credit as a solution to the problem...I do not know....it means you must believe, in the bubbles being important to save....staggering!
No, no matter how cany, you cann'ae.
I accept that in a finite (and shrinking) sphere of operations, there will be a scrap over whatever.
Whether it's bankers, or anyone else - Brash/Kerr/Property developers......
I never (I hope) advocated cheaper credit. I always advocate paying as you go.
I do prophesy the end of usury, though. That's entirely different. It can't be underwritten on the way down.
I don't advocate bubbles - but they will always happen in an uncontrolled environment - too many bunnies (sorry, Mum and Dad investors).
Read what I wrote above.
Have a good'um. I'm away to teach some kids how to sail on a pond.
The recession is a consequence of rash uncontrolled borrowing and splurging madness into property speculation that leaves this economy unbalanced and exposed to macro black swans.
Current policy dictates that families be sacrificed to protect bank profits...that banks be allowed to continue to exert their control over the whole economy with more cheap credit in a game that can only serve to make the banks more powerful and the families less so.
This is in essence no different to the events going on in Ireland. The peasants are being treated as serfs to bailout the bastard banks.
Thankfully the public are waking up to this scam and have started to avoid debt and to pay down that which they have....long may this continue....it is the only way to force the game to end.
Muzza, you are too young to realise that us older folk have been through a bit and are totally unsympathetic to you younger ones bleating on about national super. We want all our entitlements and indeed we do not have as many as in Australia. So you just keep paying your taxes and we will keep the benefits due to us.. Must away now to play bowls.
Brash doesn't seem to realise that when the govt sells something, the new owner wants to make a profit on it - usually quite a big one. That then increases the amount we need to pay to use that service. All of that profit goes offshore instead of to the government.
For example, about 10 years ago I used to pay about $20 a month in bank fees - every eftpos transaction, etc. All of that money was going straight to Australia. Now I pay no bank fees at all. I reckon Kiwibank had something to do with that (even though I bank with ASB)
I personally think the government should provide more services in competition with monopolistic industry - for example KiwiSuperMarket would save us a lot of money in food each week, KiwiMobile would cut mobile costs in half, etc. Would probably make us all better off than the tax cuts, and the government makes a profit too - what is there not to like!!
Some of the earlier comments on here are unfair to Don Brash.
If anyone understood the role of land supply issues in the housing bubbles, it was him.
He certainly wouldn't have expected it to be possible to contain such bubbles purely with an OCR.
Had he won in 2005, I believe he would have done his best to bust through the land racket and stop the bubble in its tracks.
He would have been unique in the world in this respect had he got to do this.
One of the most unfair comments above, connects Brash with the property interests who resist reform to land supply processes. The fact is Brash was almost unique in having the courage and honour to speak and act against these vested interests. The inheritors of the Mickey Savage mantle did not - so much for the low income earner and the young.
While Labour and the media did a beat up of John Key's TranzRail shares, nobody asked how many Clark Cabinet members owned investment properties. Why is this not corruption that deserved exposure?
Phil - see:
http://www.interest.co.nz/news/have-your-say-housing-minister-others-benefit-rents-paid-government
Alex did a job on poly's and property. There was an earlier article too, but before I started commenting on Int.co. (Alex could probably find the link for you.)
See in particular the last 20 or so comments on link above. About 5% (ish) of the population involved in property investment, but about 60% of parliamentarians, at least as declared under the pecuniary interest lists, where direct involvement is declared. Plus you'll find it's not just Labour into it, surprisingly. Got any idea as which party has most interest in thies area? Strange, you are expecting parliament to vote on stuff that restrains the property ponzi? C'mon Phil, whether it's your 'silver bullet' or a little of each of solutions to the other well recognised causal factors, let's get real ...... no matter who is in government.
Cheers, Les.
PS - keep up the good work, even if it is only on your one causal factor, it's useful stuff.
Thanks for that, Les, that was more info than I had spotted before.
It's really over to the media, then, to be consistent about politicians and their vested interests. Any suggestions why the deafening silence from the media about political intransigence on this issue?
My own theory is that the media pander to the Greens spin on issues like "sprawl" and "the planet" and so on. It is incredible what corruption you can get away with if your basis for it is sanctified enough.
Maybe a pecuniary interests list for the media would help? I recall Bernard being interviewed by Paul Henry around the time of the last budget and he seemed to stifle any attempt by Bernard to talk about property taxation. As for the Green angle with media, who knows and although, apparently, Greens super is heavy on property (I read somewhere) they are the only party calling for a CGT - maybe they are true 'holder' types, who knows.
Cheers, Les.
Me, thought you was one who made sense, but now you sounding like the Wolly.
My point is that plenty bleat on about this and that, but woe if they personally are to take a hit, like cutting the national super. Pretty hypocritical and so take the lecturing with a grain of salt
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