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JUL 11

Conference must deliver something…

A Conference on ‘New Zealand's Macroeconomic Imbalances’ was held by the Treasury, the Reserve Bank and Victoria University last month. The Conference was designed to build on a similar forum in 2006 called ‘Testing Stabilisation Policy Limits in a Small Open Economy’. The problem was despite a financial crisis and a recession in between times there was little to update. The exact same imbalances exist and there has been little to no progress made to address them.

Bob Buckle opened the 2006 Conference detailing the problems they were looking to address. A couple of excerpts stood out:

“The so-called imbalances have manifested themselves in a number of areas: CPI inflation has increased beyond the top end of the Reserve Bank’s target band; the balance of payments Current Account Deficit (CAD) increased to over 9 per cent of GDP (one of the largest amongst developed economies); asset prices (notably house prices) increased rapidly; and household debt levels rose to historic highs.”


“Associated with this pattern, the New Zealand economy also experiences large exchange-rate swings over the cycle. These large swings may have adverse effects on investment and productivity, again particularly in the tradables sector.”

Since the 2006 meeting the current account deficit has remained a problem, house prices have remained elevated, the exchange rate has not eased off for a significant period of time despite some swings, and investment and productivity levels have remained low.
Both Treasury and the Reserve Bank encourage the Government to tax capital gains, but other than that there is little policy advice made public. New Zealand’s economic fortunes are such that these institutions should be pushing changes to revitalise the tradable sector and drive productivity growth.

Bernard Hickey made these comments after attending this years’ conference:

“There was a lot of talk about unintended consequences and finger pointing at politicians and voters. There seemed to be an awful lot of shoulder shrugging and a disturbing acceptance of our lot in life. New Zealand seemed stuck in a rut as a commodity exporter with a high currency, high debt and a reliance on foreign creditors.

My frustration culminated in the final session where two very senior figures in New Zealand's business and economic community questioned this status quo. They pointed out that our reliance on a floating exchange rate and an inflation-targeting central bank had led to high interest rates, low investment rates and higher foreign debts. They were essentially saying the orthodoxy adopted since the mid 1980s was not working.
Their points weren't even addressed by policy makers with their hands on the levers of monetary and fiscal policy.

The whole conference reeked of complacency, a lack of urgency and a sense of impotence.”

It is important that meetings like this occur so that strategies to deal with the economic issues of the day are discussed, but this must be followed with action. The argument that economic changes can’t be made for political reasons is a weak one. A number of these policy issues, capital controls for example, fly under the public radar and in any case who wouldn’t vote for changes to make them wealthier?

Discussions like this must be followed up with recommendations to the Government. This will reinforce the major areas of work for the Treasury and the Reserve Bank, and put the necessary pressure on the Government to instigate change.

tags: treasury, reserve bank, bob buckle, macroeconomic policy, exchange rate, current account deficit
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