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AUG 11

Global problems further discredit our policy framework

Further instability overseas is making the debt path proposed in the Budget look increasingly optimistic. After the Budget we were left with the feeling that the Government had underestimated the extent of New Zealand’s debt problem – there was little done to further limit debt expansion or rebalance the economy to grow export earnings.

This chart shows that relying on Treasury forecasts is a dangerous practice. The new debt concerns in Europe and the difficulties raising the debt ceiling in the United States have simply reinforced the fact that a more realistic view of the world needs to be taken for the next few years.

Bill English made this comment last week:

“I think we’re going to have to get used to outbreaks of market volatility and loss of confidence. This could go on for years.”

I totally agree.

Those exact conditions mean that there needs to be a debt buffer so that we do not risk problems when there are further crises. This means considering the realignment of the entitlement to national superannuation, welfare packages, tax rates and the overall shape and fairness of the tax system.

It is important that we have economic policy settings that allow exporters to earn when there are upturns. We recently witnessed a brief increase in sales but then margins were erased by the high dollar; the loss in sales momentum due to world worries saw the dollar fall but too late to help the real economy. Urgent action on the currency is justified, the rest of world are manipulating their currencies – New Zealand stands aside from this for political reasons. We have even seen some action lately from Japan that has taken some of the sting out of their problems; this is not about an intervention or not, it is about a broad fiscal and monetary framework that deals with debt in the domestic economy without upwards pressure on the exchange rate. The existing policy framework is broken it is time to fix it.

tags: treasury forecasts, budget 2011, exchange rate, debt
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