Our high exchange rate is killing exporters

The high kiwi dollar is preventing the long overdue rebalancing of our economy according to Reserve Bank Governor, Dr Alan Bollard.

Dr Bollard made those comments in June 2009 to his Board when the kiwi dollar was worth US$0.63 and the Trade Weighted Index (TWI) was at 60. Since this time, the kiwi dollar has appreciated 28 percent against the US dollar to US$0.81 while the TWI is up 21 percent to 72.6.

The New Zealand economy has been seriously unbalanced for years. It has had large current account deficits and, in order to pay for those deficits, it has built up high levels of external debt and overseas ownership of the economy. The only way out of this downward spiral is to rebalance the economy towards the tradeable sector so that it can perform much better, but that needs a lower exchange rate.

As I showed last week, the Business Operations Survey provided plenty of evidence of how the high and volatile exchange rate is hurting our export industry with close to half of all New Zealand export companies saying it is the most important factor constraining their exports.

We need to have a national discussion on measures that can stabilise our exchange rate at levels our export industry can thrive in. Overseas governments have been taking this issue very seriously.

For example, in Switzerland, their Reserve Bank has been using quantitative easing to keep their franc lower, their export industry in business. The IMF recently backed the Swiss move to effectively “print money” saying the measure was “appropriate” in the circumstances.

So there are practical steps a small trading nation like New Zealand can take that can help.

Besides empowering the Reserve Bank with a mandate beyond inflation control to include managing exchange rate levels and volatility, we could also institute a tax on capital gains (excluding the family home) which would also act to ease upward pressure on the exchange rate.

It’s way past time to start having the conversation.

Russel

 

 

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58 thoughts on “Our high exchange rate is killing exporters

  1. “cash” purchaser… arggh. The point is that monetary transfers in that scenario would entail physical transfers of energy. If foreign money is to be used to back our currency some form of energy would have to be transferred into New Zealand to back up the transaction. The OTHER point is that by ditching Fractional-Reserve debt-backed money we would be putting a spike in the REQUIREMENT for growing consumption to keep us whole. That makes the sacrament of “Growth” (hasn’t anyone else NOTICED that this is regarded as the most important thing in economics?) something less of a requirement, and just by the way, makes it a lot easier to keep our carbon footprint light.

    We have additional problems, that there is no such thing as a “post industrial” economy, that automation means manufacturing jobs aren’t as easy to come by due to the efficiencies demanded at the prices that some common goods get made now, and that we are so far from the major economies and our own market is so small that our manufacturing sector only exists because it is SO small they could not be bothered to take it over… and because we’ve a historical societal (and wholly reasonable) resistance to such takeovers.

    There are issues around this that don’t get solved at all in any economy based purely on “producing” for a living. As a society we can produce now, far too efficiently for everyone to have jobs doing that. We can accept a reduction in that efficiency so that everyone has work, or we can come up with a new model.

    I do not think there is a third choice, and I do not know what the new model should look like. Suggestions are invited.

    BJ

  2. Well one COULD always do what I have recommended from the start, which is yank control of the currency back into the hands of the government, and back it with work done in the form of electrical power… here.

    That could be managed so as to keep the foreign inflation of supply at bay, and the access to mortgages to buy houses would be more directly controllable. Wouldn’t stop the case purchaser but it WOULD enable the stamp to do its job.

    The object is to inflate the currency to the point where the house-land combination is again at 3-4 years salary instead of 5-6, back to where a mortgage of 30% of income is adequate to buy the house. Of course THAT implies a lot of additional work on the housing market here, because NZ hasn’t done ANYTHING about housing correctly, that I can think of offhand. There are only two ways to get the proportion of money tied up in housing down to sane levels and trying to reduce the prices of existing houses is unlikely to work. Inflation on the other hand, is usually possible if you control your money supply.

    As a sovereign state we CAN do that. We don’t because the banks don’t like it… and governments worldwide (except apparently, Iceland and Sweden) are pnwed by banks.

  3. Gregor, stamp duty earns tax money for government (that can be spent on public housing I suppose) but has not limited house price rises in Oz.

    The problem is access to external capital flows to bid up values – a continuing bubble market. Local tax regimes are not the direct issue.

    The RB can require more of the total home mortgage loans to be from the local savings pool, they can seek minimum deposit levels and we could limit mortgage cost write-off for rental property to a maximum of half the property value (falling over time to half the original purchase cost).

    Personally I otherwise favour GST on residential property loans and personal consumer finance – this would allow a lower OCR and borrowing cost for investment in production.

  4. So photonz calls a CGT in Oz excluding the family home a CGT on housing but describes a proposed CGT in New Zealand, excluding the family home, as one not including housing.

    Depending on what seems convenient in the debate of the moment I suppose …

  5. @ bjchip

    Maybe…. Not sure how to keep the money out of housing.

    Stamp duty, reduced on any property that the buyer is domiciled?

  6. It seems to me that “inflation is our friend” here. Cheaper money and more of it in Kiwi hands, higher pay and higher prices and higher payouts to beneficiaries, all things (except houses) should go up so that the dollar itself comes down… and so that the RELATIVE price/value of the houses we are paying off goes down with it… and the actual value of the dollars we are shipping off to pay off foreign banks goes down as well. We should be looking for 4-5% monetary inflation now, not forking ourselves with limits. This would have to be carefully watched, but we can’t afford to run things the way we are doing now.

    Can we do that? Maybe…. Not sure how to keep the money out of housing.

  7. Photonz words translated… I don’t care if the same amount or more money is spent, as long as it isn’t done through government.

    You really should pay attention Photonz, the whole point is the NET effect on the people in the country, not the specific point of how much tax we pay… because the flip side of that is how much health money doesn’t get spent on private care.

    That’s really the only difference… that and the fact that the government takes care of everyone and private services only take care of the people who can pay.

  8. bj saYS ” but neither of us need to go to the effort of looking up the exact numbers. They are not relevant.”

    BJs words translated “ok, the billions spent on private education and healthcare do save the taxpayer, but I won’t admit it”.

  9. The usa has a private health system and its very inefficient.

    It costs more and delivers less.

    Charter schools means business getting their hands on state education funding.

    It will take money from and hurt public education.

    But because it delivers large profit$$ to a wealthy few the nats want to copy it. I wonder how much money/donations the nats have received from intere$ted partie$ ????

  10. The notion that adding 3-4 students to each class or a few more patients to each medical center will require an exact incremental increase in expense seems somewhat wrong, but neither of us need to go to the effort of looking up the exact numbers. They are not relevant.

    The real point is that the money gets spend irrespective of whether the government or a private individual spends it. Money is conserved in this and the numbers cannot be greatly different in either direction.

    The only difference is the provision of service to everyone vs the provision of service to the people who happen to have the money to pay for and happen to be in the vicinity of, private facilities. The provision of public facilities IS uneconomic in that manner, but is economic in that it supports the public as a whole, not just those who pay.

    There are actually not a lot of things that should not be handled by the private sector, but those limits, few though they are, are not observed by National or its owners…. or by you.

  11. BJ says “Billions Photonz? You exaggerate atrociously.”

    Wrong – it would easily run into billions if all the govt had to pay for all the private education and health.

    We currently spend over $12 billion on educating 5 out of every 6 kids.

    The other 1 in 6 kids are educated privately.

    We currently spend $14b on healthcare which is 77% of total health costs.

    The other 23% (around $4b) is privately paid for.

    It is obvious that if the taxpayer had to pay for ALL education and ALL healthcare, the cost would easily run into billions more.

  12. Billions Photonz? You exaggerate atrociously. More certainly and the cost to the people paying the private system for care would be reduced, as all of us would be taxed, and the “have mores” would be taxed more but the care WOULD BE AVAILABLE FOR EVERYONE, and provided throughout the country, rather than where the private sector deems it economically feasible to set up a center.

    You can’t send some kids to private schools, the schools won’t take ‘em… or just aren’t anywhere near where the need for a school exists. The private hospitals don’t accept the charity cases either. The insurance system works hard at cherry picking to ensure that it gets the people who pay and don’t need care, while the public system does the heavy lifting.

    Your ideology is so narrowed and blinkered that you still don’t understand that you should not run a country as a business proposition.

  13. bjchip says “The problem is that while the “monetary” cost to the TAXPAYER might seem smaller, the cost in terms of the quality and availability of care for those not covered goes up”

    Anybody can see that is the opposite of reality.

    If all the poeple who had private healthcare, and all the children who had private schooling, all changed to the public system, taxpayers would have to pay BILLIONS of dollars more to educate all the extra children, and operate on all the extra people.

    Every private operation, and every kid in private school, means there is more money for the public system. For the cost to educate 1 child in the public system, we can educate 3.3 in the private system.

    Your ideology is so narrow and blinkered that you don’t even understand that bringing tens of thousands of people from private education and health back into the public system would mean there is either LESS money per person than we have now, or we have to pay billions more.

  14. So concerned with the savings to the taxpayer you are, yet there is no such thing as “a little bit” pregnant.

    The problem is that while the “monetary” cost to the TAXPAYER might seem smaller, the cost in terms of the quality and availability of care for those not covered goes up, the net cost to the society is different from what you measure in money. This is ALWAYS where you fail us Photonz.

    When the invisible hand fails to support our society properly it costs us. Not surprising when it fails though, as it doesn’t actually exist/work.

  15. Gregor – either way, there is a massive saving to the taxpayer compared to if the person had gone public to begin with.

  16. @photonz1

    For every person who goes private to get an operation done, the public save 100% of their medical costs compared to if they’d gone public.

    Not quite. It would be fair to say that post operative costs are 100% saved but given that most surgeons also work the public lists, there is a clear opportunity cost to the public health sector.

    Also, if something goes wrong in a private case, acute cases end up in public. So while the private ensurer is eventually charged for this, the expertise, equipment, consumables and care are still provided by public health and so can’t be utilised by the public list.

  17. BJ says “They do not however, serve the public. They are private.”

    Of course they do.

    For every person who goes private to get an operation done, the public save 100% of their medical costs compared to if they’d gone public.

    For every kid who goes to a private school, the government saves 70% of their education costs.

    That measns if 1000 children go private, the govt saves enough to edcuate 700 in the public system.

    Or put another way, for the same amount of public money, 1 child can be educated in the public system, or 3.3 children in private schools.

  18. SPC says “while having a CGT on shares, but not on housing. So your scaremongering about the consequences of a CGT is hardly evidenced in the real world. ”

    Wrong.

    Australia does have a CGT on housing. That’s what started their problem with what Aussies call mansion syndrome.

    It caused MORE money to be put into any houses which could be exempted (i.e. family home, another home for your teenage one, one for your daughter, live in the rental for a month so that could be sold as a family home – or just redirect your mail there for a while).

    Once you exempt “the family home” you introduce so many loopholes that Aussie advisors say you only pay CGT on a house, to paraphrase, “if you want to”.

    We have a major structural problem in NZ. We spend all our money on our houses, and very little on the productive sector.

    We need to come up with solutions that fix this problem – not make it worse.

    If we don’t fix this one issue, then you can forget ever fixing other issues like poverty, lack of money for education, health etc.

  19. I haven’t the money either. My Mom was a teacher though. We saw it happen like clockwork. The charter schools are not for the kids the system fails… except in that it can’t challenge the talented. The private schools don’t help “everyone” they help the ones who are easiest and most economically able to be helped.

    The problems of the LA public schools make it almost inevitable that just about anything looks better. However, the problem is in general, not what some charter schools can do for some kids, but what happens to all the other kids.

    It is very deceptive, to only see the winners of that little lottery.

  20. BJ,

    When was the last time you tried to keep a problem/disruptive child in a private school?

    Never could never afford to send the kids to private tuition.

    Interesting programme on TV the other night regarding the visit to NZL of USA boys and girls rugby teams from private charter schools.

    Each kid was at the charter school because the state system had failed them.

    http://blogs.newzealand.usembassy.gov/ambassador/?s=U.S.+Rugby

    Seems it works for some and possibly it might change your outlook when you see what these 15 charter schools in the Crenshaw Corridor area of South Los Angeles can do.

  21. Andrew, Gerrit

    When was the last time you tried to keep a problem/disruptive child in a private school?

    Some things do not work well when privatized. Which is why almost all civilized societies have single payer health “insurance” and public education systems. I’ve seen what happens to the private/public schools and student mixes in the US.

  22. BJ,

    Surely a private of anything (school, hospital, transport service, etc.) serves the public.

    Are the individuals that utilise the private services not members of the public?

    Thus privately owned entities serve the public.

    Plus anything that frees up one more public space (school enrolment, hospital bed, seat on bus, etc.) by an individual “going” private is good for those who cannot afford to go private?

    I’m going for my five year exam (colonoscopy) paid by the public health (to old for Southern Cross to cover me now) but the procedure will be in a private hospital (Orminston).

    More cooperation beween state and private is hugely benificial for this individual member of the public.

  23. Come on, bjchip, of course the private sector serves the public.

    The only major difference with the public sector, as we call it, is that the government acts as an agent controlling who purchases and pays for what. The government is basically the “heavies” protecting what should be an intolerable monopoly within education.

    I do not argue against the need for government help for isolated cases that need it – but that’s as far as they should go.

  24. The “cherry picking” effect is very important Andrew. The private schools do not have to educate everyone or cope with problems. The problem student is not allowed to remain in the private school.

    They get better results that way, much as a private hospital that does not have to admit whoever walks in the door can get better results.

    They do not however, serve the public. They are private.

  25. SPC: I understand that many alternative private schools in the USA perform better than standard state schools and at about half the cost. But that’s a casual understanding. There are certainly examples of this, I know. Regardless, the fact is that the room for innovation for cutting costs in education is vast, and I believe the same can be said for health though to a lesser extreme.

    Also, you need to be careful with regulation. Government regulation can be so thick that you have the “privately owned but [virtually] government run” scenario, making privatisation a waste of time. You can’t put innovation in a straight-jacket and expect improvement.

  26. Why is it fair for a builder to have to pay taxes on selling a spec house when the many non-builders, who build what are effectively spec houses gain an untaxed income from them.

    I have built houses for many people who are obviously building them for income.

    If people are buying and selling houses for profit, then the existing law already allows them to be taxed on that income.

  27. Is there any evidence from anywhere in the world that moving from public health and education to a privatised system results in more services for less cost?

  28. Kerry: You can do any right thing wrong, and we have privatised that which should not have been privatised – such as natural monopolies on non-dispensable services.

  29. Photo. You continually mention Zimbabwe without any understanding that their situation bears no resemblance to ours.

    Increasing the money supply while shooting the means of production is of course going to result in inflation. Don’t see that happening here.

  30. Why is it fair for a builder to have to pay taxes on selling a spec house when the many non-builders, who build what are effectively spec houses gain an untaxed income from them.

    I have built houses for many people who are obviously building them for income.

  31. CGT does need to be as universal as possible, but all the objections above to including housing are not reasons to exclude housing or not have a CGT. Just reasons to structure a CGT better.

    Excluding houses under, say, the median in Auckland, indexing for inflation (though most other taxes are not), taxing only the difference between selling and buying a new family residence removes most of the objections while keeping distortions to a minimum.

  32. So you do realise that Australia has grown their sharemarket investment “600% faster than ours” while having a CGT on shares, but not on housing. So your scaremongering about the consequences of a CGT is hardly evidenced in the real world.

    A CGT excluding owner occupied housing is commonplace (because taxing all income is what a fair tax system does). Where there is a tax including property most owner occupied housing is exempted as they are under the threshold.

    We have housing less affordable than most in the OECD that have CGT excluding most, if not all, housing. So CGT regimes are not the main determinant of housing values.

    Further

    1. Most house sales are not by those downsizing for retirement, they are by those moving from house to house before retirement. Placing a CGT on these people means robbing them of equity and means they have to re-finance (borrow more offshore) to buy another home. That is so unfair as to make it unthinkable for any government – no wonder someone who opposes the standard international form of CGT suggest such a poison pill to kill the idea.
    2. Most owner occupied housing is not part of any investment strategy but just functional.
    3. Even a nominal CGT owner occupied housing (the one most commonplace – a threshold excluding c80% of houses from the CGT) comes with an economic cost – it deters investment in new larger properties. This means less houses are built and less jobs in building and a shortage driven INCREASE in house prices and rental cost.

  33. SPC says
    1. The rising value of a house is not income.
    2. The sale of one house necessitates the purchase of another. What income is there to tax?

    Are you serious? It’s probably the most common form of retirement investment in NZ.

    HUNDREDS OF THOUSANDS of people put money into large houses, lifestyle blocks etc, and intend to downsize on retirement.

    CGT on everything except the family home encourages MORE investment in houses, and LESS in the productive sector.

    Companies can get around it by paying out all their after tax profits in dividends, rather than reinvesting and growing the company (which would then be double taxed for growing).

    It encourages people to do the OPPOSITE of what is desperately needed – all the things we DON’T want.

    Over investment in housing and underinvestment in the productive sector is already a serious problem for the future of NZ. Relative to NZ, Australia have invested and grown their sharemarket 600% faster than NZ in the last 20 years.

    So why on earth would you introduce something that makes a serious problem much worse?

    A CGT on everything except the family home would –
    1/ make housing unaffordable
    2/ suck money out of the productive sector
    3/ force rents upwards for those who can least afford it.
    4/ worse our balance of payments by increasing debt (it went up massively from $60b to $160b in the housing bubble of the mid 2000s – we all own exactly the same houses we used to – it’s we now owe an additional $100 billion to overseas banks for the same houses).
    5/ borrowing so much means our currency will stay artificially high, and exports will suffer.
    6/ this will further worsen our balance of payments.

  34. A CGT is on realised income.

    1. The rising value of a house is not income.
    2. The sale of one house necessitates the purchase of another. What income is there to tax?

    A CGT is not designed to be anything but part of fair tax system.

  35. SPC says “The realised increase in value of an owner occupied home is not income – it is simply part of moving from one residence to another. So no CGT is due.”

    Rubbish. Most of our friends have invested ALL their retirement savings money into their properties. It’s very very common in NZ.

    We’ve stayed in a modest house and invested into the productive sector.

    You want to reward those who put their money into houses, penalise investments in the productive sector.

    And unbeleivably this is supposed to move money away from housing INTO the sector that is penalised….on what planet would this happen?

  36. The realised increase in value of an owner occupied home is not income – it is simply part of moving from one residence to another. So no CGT is due.

    PS As for Oz housing, compare like with like, there have been many new larger homes built because of the growth in incomes there – this increases the value of the average house. Every upgrade made, leaves a owner occupied home free for a landlord to let – this raises the quality of housing for all.

  37. SPC says “It is a also a bit rich that someone who opposes a CGT on shares insists that any include owner occupied housing.”

    To clarify, I’m saying IF you bring in a CGT to try to shift money from housing to the productive sector, but then have a loophole for the most houses – it will do the opposite of what you want.

    Just like it did in Australia. It moved MORE investment into the loophole (housing) because it was not taxed.

    That created even higher prices, which meant ther ewas even more investment in housing – a double whammy.

    And now virtually every Australian city is in the list of the world’s most expensive cities for housing.

    And rents went up massively.

    So IF you want to use CGT to move money from housing to the productive sector, you need to do that in a way that makes the productive sector relatively MORE attractive for investors.

    It’s blindingly obvious that making the productive sector LESS attractive than housing will move money in the opposite direction of what’s needed.

  38. SPC: Don’t compare us to other countries. The rest of the industrialised world is not a model to emulate, in my view. The small government model targets spending only for those who really need it; we could do well with it right now.

  39. Andrew Atkin, do we really have a large government? Our spending on health and education is low per capita compared to those with lower government/GDP ratios- it’s just that our low incomes mean we spend more of what we have to provide even less than what other countries deliver. And remember other countries do not have tax paid super and that inflates our government share of GDP compared to others. Our one advantage has been a lower debt level to finance.

  40. There is a difference between seeking greater competitiveness for New Zealand business and supporting the terms of the free trade deals that others negotiate.

    It is a also a bit rich that someone who opposes a CGT on shares insists that any include owner occupied housing.

    A CGT on owner occupied housing makes no sense. New Zealand has one of the most mobile populations anywhere. Placing a CGT on the sale of a house would result in loss of equity and the need to borrow more money to buy a replacement house – this would increase foreign debt and place upward pressure on the dollar. Given the owner of the property needs to replace it there is no real income gain to be taxed in the first place. Fixing labour in place because of the CGT impost on sale of a home (on top of real estate fees that already occur) would make us less productive in utilisation of labour.

    CGT including rental property is sufficient to deal with speculation on property (the real area of debate is whether a bach should be seen as part of owner occupied property – maybe up to a cap of a $300,000 or a total of $1M for both properties).

  41. It’s a bit ironic how we have this massive government. I mean, if we’re gonna have a government controlling 45% of national spending, then what should it spend its vast budget on? What should its priorities be? I would say it should get rid of all poverty and hardship first by making housing and food cheap, then spend the money on other things from there, if it must. And the irony is that we have this huge government but still we have more poverty. Obviously we are an embarrassment.

    So why not cut back on national debt by first reducing the size of our government by axing everything down, until we are funding only what we should be funding (anti-poverty stuff). This would be a good start. It would liberate resources for productive sector expansion too.

  42. Kerry says “But the rest of your post takes this months prize for lack of economic understanding…”

    Which describes his next sentence “Increasing the money supply does not cause inflation unless their is excess demand/insufficient supply.”

    Zimbabwe printed money with no demand and overwhelming supply, and had world record inflation. – exactly the opposite of what you say happens.

    It’s not that difficult to understand. The NZ govt could print as much money as it wanted to pay it’s bills (like Zimbabwe did). The doesn’t change the value of the goods and services produced by NZ.

    If they put double the money into circulation, all it means is inflation rises so you have to pay twice the dollar amount to get the same product or service.

    When I was in Zimbabwe in the 1990s, the exchange rate was Zim $6 = US $1. When the govt started printing money, the rate went to Zim 2,000,000,000 (2 billion zimbabwe dollars) = US$1.

    Civil servants were paid billions per month, which by the time that month was finished and they got paid, was worth just half a bus fare.

    Inflation was so bad that bus fares went up three times during the day, every day. Bread at one point cost $10 billion dollars a loaf.

    At one point they simply wiped three zeros off the currency, another time ten zeros, and another time 12 zeros. That proves that the numbers on the currency are largely meaningless. The value of them is largely to do with the output of a country.

    Just like when a $100 million company goes public, it can issue 100m x$1 shares, 50m x $2 shares, or 200m x 50c shares. Just because it issues a much larger number of shares, doesn’t mean the company (country) is worth any more.

    It just means each share (or dollar in circulation) is worth less.

  43. Photo.

    Yes CGT needs to be universal.

    But the rest of your post takes this months prize for lack of economic understanding and sloganeering.

    Increasing the money supply does not cause inflation unless their is excess demand/insufficient supply. With 17% unemployment there is hardly insufficient supply.
    Business in NZ, and elsewhere, are failing due to insufficient demand.

    One of the USA’s, and Japan’s, problems is that despite pouring in trillions, demand is refusing to rise.

    If printing money has such severe negative effects why do we let private banks do it?

  44. Correct me if I’m wrong, but wouldn’t QE raise inflation? Leading to generally higher interest rates which are then hugely attractive to foreign investors looking for low risk. Wouldn’t this in turn push up the exchange rate?

  45. Russel wants more trade, but is anti free trade deals.

    Russel complains that inflation is hurting the poor, then advocates printing money which causes high inflation.

    Russel complains about external debt, but want the government to spend more on just about everything.

    Russel wants to rebalance the economy towards the tradable sector, but wants a capital gains tax on everything except family homes, which would shift investments AWAY from the tradable sector TOWARDS family homes.

    The problem is anything simple like printing money has severe negative effects too – just look at Zimbabwe. It wipes out billions of dollars of peoples lifes savings whether their money is in the bank, their house, their pension fund, or their business.

    Russel says “It’s way past time to start having the conversation.”

    The exchange rate conversation has been happening for decades.

    But you’re right that we need to keep having it, and in particular how to shift money away from housing towards the productive sector. Putting a GCT on everything except the vast majority of houses will have the opposite effect – relative to other investments, that would make housing MORE attractive, thereby attracting even more money, and starting an upward cycle.

  46. alwyn, a fall in currency by 10 or 20% does not cause much inflation over the medium term, let alone the long term. No more than a one off introduction of GST at 10%/15/20%.

    Generally we determine the value of the currency – whether it is high or low based on relativity to the value when it was first floated back in the 80’s. As before then the government would determine the value by revaluation or devalutation independent of any market – the government devalued in response to the 70’s economic decline after we ended our time as the UK farm.

    Since we floated we have between under 50 cents American (in the 80’s) and up to 90 cents American since. The currency began to rise after it was floated because we set the OCR much higher than most nations of the OECD and because we borrowed so much for housing. Operating a currency policy with a lower OCR (using GST on mortgages) and reducing the amounts borrowed offshore for private consumption (required local savings and long term savings ratios for banks can help) are amongst the tools available.

    The middle class has done very well via the lack of a CGT over the past 25 years – it was the productive economy that suffered. Any CGT liability that went with any increase in inflation would only be redress and enable the affordability of R and D tax credits, Fast Forward initatives, loans to farmers to bring their farms up to optimal standard (creates jobs) etc.

  47. Perhaps you would care to explain just what you think the optimal exchange rate should be.
    I am old enough to remember when the NZ/US rate was 1 pound to $US2.80.
    That is equivalent to $NZ1.00 to $US1.40, ie nearly twice the current value. It dropped because the New Zealand governments simply spent far more than we produced. I can also remember when a NZ $ bought 3 Singapore dollars. Now it is 1 to 1. We were better of than Singapore then. We certainly can’t say that now.
    I suppose you think a 40c exchange rate would be better than 80 cents. What about 20 cents, or 10 cents? Do we really want to follow Zimbabwe into the black hole of hyper-inflation?
    The only people who gain from inflation, which you are implicitly endorsing are politicians. The can protect their own standard of living and the bracket creep that occurs simply gives them more and more of other peoples money to waste. The people who lose most are the middle class, from whom most of the Green party support comes.
    It is interesting that you mention a capital gains tax. If we had inflation of 10% per year over 7 years say, and I suspect that would be the minimum if your policies of forcing down the exchange rate took place most real assets would be worth twice as much in nominal dollars. A Green government would then tax the increase in nominal value even though there was NO increase in their real value. This will give you plenty of income. Unfortunately it will merely put New Zealand into an even deeper hole than it is now.
    Perhaps we could help our exporters by getting rid of the punitive government charges. Why should we penalise our food producers, who help feed a starving world, by being the only country in the world to include agriculture in an ETS scheme?

  48. While the currency is high we will continue to experience downward pressure on wages – this in both the internationallly competitive sectors and the public service (health and education) because of falling tax revenues. We will experience low wages dependence on cheap low quality consumer imports and struggle to own housing – the last factor will result in a poverty for those with low retirement income and no home ownership

    There are a range of answers

    1. print money to fund government deficit spending on infrastructure, rather than sell assets. The government’s preferred option of borrowing increases the value of the currency and equivalent government spending cuts reassures the market. Thus there are no rising debt fears pushing the currency downward – paradoxically this fiscal prudence is damaging to the very export sector that supports it.

    2. place GST on mortgages – to raise government funds and dampen down the bidding up of property values, all while holding down business borrowing costs with a low OCR.

    3. restrict the ability of landlords to offset mortgage as a cost to only 50% of the property value and require a minimum deposit of 20% to buy homes and 25% for rental property (a lower rate for purchase of newly built homes). This encourages new home building rather than borrowing to buy existing property – lower house prices reduce offshore borrowing and thus upward pressure on the currency.

    4. a FTT.

  49. @dbuckley

    Agreed, but it’s about eating the elephant one mouthful at a time.

    We can’t change a painfully volatile, commodity based export economy overnight – it’s been with us for well over 100 years and there are massive vested interests in maintaining the status quo.

    What can be done at the flick of a pen however, is mandate that the RBNZ has more to worry about than keeping inflation low.

    Which does beg the question – what do we employ all those wonks for if the only blunt instrument the RBNZ really has is the interest rate lever to increase and reduce the money supply?

  50. There’s nothing wrong with our exchange rate; when we decimalized a buck was worth 10/- (“ten bob”) and we’re back there now, give or take.

    The actual problem is that we have exports that compete in price sensitive markets. If our exports were of higher “value” then buyers would be pleased to pay whatever the price was. Same old story. That’s what we should be having a conversation around.

  51. This sounds rather like the global drive to the bottom as all countries try to trade their way out of debt by devaluing their currency. I suspect we are too small to play this game effectively.

    It would be nice to sell more, but we could also buy and spend less on imports.

    I vote green, I am a saver, have no debt and rent my house. if you devalue the currency you will be punishing my family for being frugal.

    Your thoughts on that?
    Andrew

  52. Given the push towards more consumption fuelled by the whole debt cycle, we need to have an even bigger conversation about the monetary system as a whole and how it might be possible to move towards something based on real goods and services.
    Putting the genie back in the bottle won’t be easy!

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