Alasdair Thompson: Monetary policy is not the only answer

Alasdair Thompson. Photo / Supplied

It's great to see Labour state in Monday's Business Herald that the key to turning the economy around is to encourage exporters.

To do that, says Labour's finance spokesman David Cunliffe, monetary policy must change.

The change he wants is to achieve lower, more stable interest rates as a means to achieving a lower, more stable New Zealand dollar. Were it that simple, we would surely already have measures to do it in place.

To achieve Labour's objective we might ask why Cunliffe places so much emphasis on monetary policy when a focus on fiscal policy could achieve the desired outcome faster.

That is, if the Government were to cut its demand for revenue via taxes, more New Zealanders could afford to save more in a (compulsory) KiwiSaver scheme, and this would achieve higher domestic savings which would help stabilise interest rates and the exchange rate, which Labour says is essential.

But would Labour countenance reducing the tax take?

It is true that high interest rates in the past have encouraged foreigners to seek them through the carry trade and other ways of buying the New Zealand dollar.

In turn this has pushed the exchange rate up. But many other factors also affect the volatility and price of the kiwi, and the biggest of these is the change in prices of other major currencies.

Also, we should bear in mind that the NZ dollar is attractive partly because we have stable government and relatively low inflation while our appetite for borrowing overseas also pushes up the price of the currency.

We have been finding out lately that achieving a lower official cash rate in New Zealand will not necessarily result in reducing our interest rates.

Labour's plan to have the Reserve Bank further regulate (increase) our banks' capital adequacy, and hold a higher proportion of their liabilities in domestic deposits may have the unintended consequence of increasing the interest rates demanded by local savers compared to foreigners. That is, it could increase interest rate stability but also stifle bank lending to grow businesses.

Nevertheless, Labour is right to review things like these that will lead to a greater reliance on our own savings funds rather than those of foreigners.

Likewise, its view that inflows of foreign money could be taxed to discourage them bidding up the price of the NZ dollar isn't new.

Brazil, for example, has such a tax but again it's no silver bullet for them and it may also discourage the very type of foreign investment we want to help build our economy.

One really important thing Cunliffe did not mention is that monetary policy alone cannot do all things. It needs friends in government so that the ever-increasing demand for more revenue is held back, and the value of government spending becomes more productive.

These things, more than anything Cunliffe has suggested, will help lower interest rates and maintain the NZ dollar within a reasonable, stable range of prices.

- Alasdair Thompson is chief executive of the Employers & Manufacturers Association.