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This is worth a read: https://t.co/gjARfKQ6JB
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19
NOV 10

Export growth - not under current settings




Finance Minister Bill English has announced that growth won’t hit the 3.2 percent in the year to March 2011 that Treasury predicted in the Budget; lower than forecast growth will also produce a higher than forecast deficit. English said that growth would rebound in the year to March 2012, but while conditions remain poor for export growth with an overvalued New Zealand dollar and continuing poor consumer demand, it is difficult to see where this export led recovery will come from.

Most of the reported rebalancing so far has come from decreasing consumption of imports rather than any great export increase it seems pretty optimistic to assume that exports will expand to cover the gap left by a lack of spending in the domestic economy. In the year to September 2010 merchandise exports rose 0.5 percent according to Statistics New Zealand and imports decreased 5.5 percent.

With the latest round of quantitative easing from the Federal Reserve and policy settings in New Zealand driving the New Zealand dollar higher since then, the prospects of a strong pick up look slim.

The table shows that New Zealand’s exchange rate is 25 percent overvalued against the US dollar, the highest of the countries included. The table also shows that it is not solely a US dollar depreciation story with the Euro only 5.7 percent overvalued and even the Australian dollar was only 17.5 percent overvalued.

So far we have seen some cost cutting and minimal tax reform from the Government. This has been helpful but when the tradeable economy has seen no growth in five years more effective measures are required. Policy changes around tax balance, monetary policy and innovation are needed to stimulate the turnaround.

The Government’s advisors need to be more forthright in their advice. The 2025 Taskforce has been focused more on explaining differences between Australia and New Zealand than coming up with solutions. Government departments such as the Treasury and the Reserve Bank also need to be more forthright with their recommendations.

The tax balance was hotly contested in the Tax Working Group’s report with a Land Tax being one option and Don Brash has mentioned before that a variable excise tax could be used to quell domestic inflation. These are the sort of ideas that need discussion, not offhand dismissal. Imbalances in the economy will continue and significant investment in export growth is unlikely while the exchange rate is a policy loose end.
 


tags: 2025 taskforce, tax working group, export growth, rebalancing
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