Reserve Bank Inquiry
Suggestions for cross party talks can be cries of desperation from a government wanting to act, but scared to touch any option. Ministers were lucky to escape with the amended smacking legislation. Sometimes, however, cross party talks collapse in vituperation as happened with superannuation in the 1990s. This could easily occur with Helen Clark's select committee to study additional tools for the Reserve Bank to control inflation. It is important that careful steps are taken first to identify the precise problem under study. Yes, on the surface the current Official Cash Rate system appears to over-inflate the exchange value of the dollar. The export sector suffers, and we over-import. Some jobs are shifting to countries where cost structures are lower. But before we embrace a system of controls, taxes and more regulation, the select committee needs to understand the basic problem that causes this. If we aren't careful, we could quickly return to Robert Muldoon's fiscal hothouse where an assortment of new rules and regulations produced distortions to the economy, ending in his ill-fated wage-price freeze, then the devaluation crisis of July 1984.
There are many inflationary pressures right now and they are reflected in our high interest rates and in the money that flows in from Japanese housewives and others who chase them. The root cause of today's underlying inflation is much closer to home than ministers concede. Government spending as a percentage of GDP has been rising too rapidly over the last few years. The cost of the bureaucracy rockets ahead. Two bursts of labour re-regulation since 2000 have produced high wage pressures too, and more strikes. Climate change initiatives will add to this. The result is that productivity has sunk to a level that is only one third of what it averaged between 1988 and 2000. Houses produce good financial returns. There is debate about whether the Reserve Bank regulations regarding capital requirements for trading banks artificially stimulate their lending on houses. Unless these factors are thrashed through and borne in mind during discussions, no amount of jawboning by parliamentarians, let alone any regulatory rushes of blood to their heads, will produce anything other than further distortions and, ultimately, disappointment.
Over the years a number of sages have suggested ways of tweaking the Reserve Bank's rules. All have potentially bad side-effects. One idea is that GST should be lifted temporarily in a situation where consumer spending is running riot. Were that tool to be used, however, it would have to be reversible once the problem had gone away, unless the government was willing to carry blame for a permanent increase in taxes. Some time ago Michael Cullen made another suggestion - a mortgage levy. The intention was to tax the increasing practice of banks trying to escape the need to lift floating mortgage interest rates by selling more on
fixed terms. Cullen's measure could be evaded. Another idea doing the rounds catches the person who buys a rental property with a capital gain in mind. As many as 15% of the population fit this category. They would become eligible for a capital gains tax at the point they opted to deduct against their taxable income the interest on the capital they used to buy the house. This would extend rules that already exist, but it would stop short of a full capital gains tax on everyone. Owner-occupiers can't deduct, and would therefore be exempt. But while the measure might dampen speculation, and take some heat out of the housing market, owner/occupiers would probably intensify their buying and selling. And the housing rental market would shrink, and rents rise. Let's be clear: none of these measures can tackle the upward thrust to inflation produced by excessive government spending. By themselves, Muldoon-like tinkerings have never worked.
There are other "bright ideas" out there. Why not set up a panel including Alan Bollard, Don Brash, Arthur Grimes, Roderick Deane and David Caygill, and augment it with an outsider like Lars Svenson who produced a report on the Reserve Bank for Michael Cullen a few years back? This would have more credibility than Shane Jones inviting his Harvard drinking cobbers for advice. The panel could re-examine the system, and identify the real causes of current inflation, and possibly produce tweaking tools that might work. Without expert advice in such a complex area, parliamentarians are unlikely to produce more than worthless band-aids to cover a serious illness. The truth is, we are collectively living beyond our means. Unless the select committee process is handled carefully, we could find ourselves rushing back towards the 1970s and early 1980s, with similar fatal consequences.