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8
DEC 11

New Government needs to walk the talk on rebalancing




Policies to help the traded sector were one of the themes of the election campaign with a contrast in approach between the two major parties clearly evident. National argued that more of the same and reducing debt would be sufficient to ease the pressure on the exchange rate, while Labour promoted a more interventionist strategy through changes to the Reserve Bank Act and the introduction of a Capital Gains Tax.

Now that National has once again formed a Government a pragmatic view must be taken; the key measure of policy success is real growth in the tradable sector, not the rhetoric of economic rebalancing. Countries around the world are making changes to address the competitiveness of their export sectors and we must be a part of the race. If that means new policy settings then new policy settings must follow.

Growth in the tradable sector requires greater certainty that will lead to higher investment. The graph below demonstrates the decline in the tradable sector since 2005. The long term trend of tradable sector growth is the best indicator of economic rebalancing.



Exchange rate volatility is the prinicple driver of uncertainty. Reducing Government debt will help but addressing private, asset based debt is an even bigger and more important issue. For that new tools must be given to the Reserve Bank to reduce the volume of debt and to prevent another asset bubble fuelling more domestic consumption and inflation. Balancing taxation to include capital gains and offering fiscal incentives to productive sector firms are also priorities.

The same policy framework that encouraged asset bubbles and stalled growth in export sectors from 2005 onwards still exists and it is vital that this changes. It is worth noting that New Zealand’s trade balance has turned negative again in the past few months and global growth is expected to soften as difficulties in Europe and the USA reflect into the Asian economies.

As the world hit the early stage of the crisis we were fortunate to have all time record commodity prices that staved off a meltdown in the rural sector, as the second round affects hit markets through Europe and the USA expect life to get even tougher; note the recent significant downgrades of growth forecasts in the UK.

The same old, same old approach has not done much for the real economy; if Government promises on closing the deficit and real economy growth are to mean anything, now is time to deliver. 

Real economy growth will be the indicator of economic success through the term of this Government. 
 


tags: exchange rate, reserve bank act, capital gains tax
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