ECONOMICS: In Black & White

Business lobby leaders who persistently rail against “big government” and excessive government spending can brandish reports from two influential international organisations to support their politicking. Business Roundtable executive director Roger Kerr has done so.
“Like last month’s OECD report, the latest report from the International Monetary Fund sends another strong message to the Government that its current policy settings are ill-founded and will not achieve the growth the Government is hoping for.”
Indeed, the IMF report – or suite of reports – clucked over the troublesome imbalances in the economy that are causing exporters to battle the high exchange rate. Among its recommendations, it advised the Government to move towards greater tax reductions and smaller spending increases.
The OECD report, published earlier, credited New Zealand with having one of the most flexible and resilient economies in the OECD, following wide-ranging reforms over the past 20 years. But “a large external deficit, very low household saving and still-strong inflation pressures indicate an unbalanced growth pattern”. Sure, there were signs these imbalances were starting to unwind, but “the short-term outlook remains uncertain”.
On current settings, the OECD report said, it would take time for inflation pressures to dissipate “and, notwithstanding large fiscal surplus, strong growth in government spending is complicating the stabilisation task of the Reserve Bank”. It cautioned against additional fiscal stimulus beyond present plans. Tax cuts or spending increases beyond current plans could further exacerbate inflationary strains, triggering higher interest and exchange rates than otherwise.
“Indeed, delaying the planned fiscal impulse for the next two years would reduce the strength of domestic demand and inflationary pressures and allow lower interest-rate path than currently envisaged,” the report said, unambiguously calling for curb on state spending. “This would facilitate fall in the exchange rate and accelerate the external rebalancing process.”
The OECD recognised that such restraint may be politically difficult, given the Clark Government’s hefty budget surplus, “but it could allow smoother unwinding of the imbalances and avoid more painful adjustments in the future”.
Hear, hear, said the IMF. They commended the New Zealand authorities on their continued implementation of “sound macroeconomic policies anchored in well-established framework” in the face of challenging environment. And they regarded recent increases in the official cash rate as “appropriate” in the light of still-stretched resource utilisation.
They welcomed New Zealand’s strong fiscal position, too, and commended the Government’s continued adherence to stable and transparent medium-term fiscal framework. But they questioned whether the current stimulatory fiscal stance would help the Government in its aim to avoid complicating the task of monetary policy. Sure, the stimulus mainly reflects pre-announced spending decisions, and the Government’s medium-term fiscal framework limits its ability to adjust fiscal policy in the short run.
Even so, the IMF recommended fiscal stimulus be contained as much as possible. In particular, they advised shifting the mix of fiscal measures planned for 2007/08 towards greater tax reductions and smaller expenditure increases to moderate any expansionary effect.
Several IMF directors, moreover, cautioned against announcing tax credits for activities such as R&D. This would represent step away from orderly tax arrangements, “and could create distortions”.
Notwithstanding the clear message to cool state spending, finance minister Michael Cullen welcomed the IMF report. It called for continued vigilance to possible shocks, he pointed out, and “that’s why I have been urging responsible fiscal policies for so long”.
Cullen took further comfort from the IMF’s encouragement of fiscal restraint, insisting: “This is why the excessive loosening of fiscal policy promised by the opposition through multi-billion dollar tax cuts, coupled with almost daily calls for new spending, would be so reckless.” He promised this year’s Budget (presented to Parliament after the deadline for this column) would show that the fiscal stimulus in 2006/07 was substantially smaller than had been forecast back in December. Furthermore, strong revenue flows meant the Government was taking more demand out of the economy than it was putting in.
In other words, Cullen was saying heavy taxing is good for us. National’s finance spokesman Bill English, on the other hand, emphasised that the IMF was advising the Government to make tax reductions and curb spending.
As readers can see, the IMF has produced wonderful set of documents. Depending on the political parties’ economic dogma, they can cite the reports to justify more spending and taxing. Or less.

Bob Edlin is regular contributor to Management.

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