Fran O'Sullivan: Don't go crackers this Christmas

It's the time of year when Kiwis go on Christmas credit card sprees only to wake up with a huge debt hangover in the New Year that no amount of Berroca will make disappear.

Should we order in the champagne and turkey or the beer and barbecue sausages, or should we tear up the credit cards, stay home and pay cash for the presents this year?

The warnings have been flooding in over our propensity to ignore relatively high personal debt levels in favour of living for today.

Reserve Bank Governor Alan Bollard (who controversially got the ball rolling once the election was out of the way) will be watching nervously to see if his admonitions against the high debt levels New Zealanders have incurred to service big home mortgages and fund excessive spending through inexhaustible credit card funds have any effect.

Retailers, who frequently sell up to twice as much in December as they do through the winter months, will also be waiting nervously. So, too, the beer barons, wine purveyors, travel companies and tourist lodges who beckon people to splash out in a raft of inviting advertisements.

But if we consumers heed Bollard's warnings, the cash registers will not ring so frequently, further fuelling the extraordinary loss of business confidence in the past couple of months.

Changing the habits of a lifetime is not simple - whether sex, alcohol or debt be the source of the addiction.

Bollard's latest interest rates rise - expected on Thursday next week - is not likely to stymie domestic inflationary pressures. These are already overcooked and should have been tackled much earlier in the monetary policy cycle.

The media has gone big on the danger of household debt and how to keep it in check since Bollard threatened that he is willing to raise rates in a way which will really hurt in order to force behavioural change.

Finance Minister Michael Cullen has invoked the spectre of a return to Muldoonism with his request to the central bank and the Treasury to examine options to get mortgage debt to sustainable levels.

Cullen and Bollard are worried that the property market is at unsustainable levels, which would see many people lose their equity if house prices took a big tumble. Their concerns are justified.

House prices did just that in the early 1970s, reducing entry prices to such a level that those previously barred were able to get a toehold.

But all the jawboning from the top floors of the Beehive and No 2 The Terrace will not convince business that the Government is on the right track unless it leads from the front by taking an axe to its own budget.

The Reserve Bank used its briefing to the incoming Government to warn of major imbalances in the economy which must be brought under control if the central bank was to keep inflation within a 1 to 3 per cent guideline.

The trouble is that - apart from petrol price rises - much of that upcoming inflationary pressure is of the Labour-led Government's own making.

The election promises Labour and its coalition partners have made to spend up large on holiday pay, student loans, more family bribes, increases to the minimum wage rate and superannuation were not properly costed by the Treasury.

Production capacity is under pressure and there are signs the current account deficit will worsen before it self-corrects.

The Government's election goodies - in the same way as our Christmas goodies - must be urgently rerated and shelved if need be, if Cullen's and Bollard's warnings that the economy might face a hard landing are to have credibility. The difficulty is that even more cost pressures are emerging.

Issue one: Price gouging by Transpower

Business is already up in arms over the state transmission monopoly's plan to put up its charges by 19 per cent. Transpower does face a huge financial burden because of the need to invest in new transmission lines to carry more electricity to fuel growth in demand.

The Commerce Commission is investigating Transpower's decision.

But surely the Government as shareholder should be underwriting a big chunk of this investment through new equity rather than adding to inflationary pressures by allowing Transpower to simply apply the old cost-plus approach of the Muldoon era.

After all, Transpower's net profit after tax for 2004-2005 was 88 per cent above budget - thanks to higher than forecast demand leading to increased revenues - according to a recent Government briefing paper.

This exacerbates breaches of the commission thresholds as a result of pricing methodologies that do not allow for charges to be transferred back when demand is higher than expected.

Would that all business had the same semantic and legal out for rampant gouging.

Issue two: The law of unintended consequences

Labour - much to Cullen's chagrin - has been forced to take court action to stop beneficiary families double-dipping by claiming up to $3000 a year under the Working for Families package.

The Government had clearly intended the payment to go to families who are not on benefits rather than giving beneficiaries a back-door rise.

But whereas Cullen will bring down legislation whenever a tax loophole emerges, he has been politically correct where beneficiary abuse is concerned. This will have a cost.

Bollard cannot yet count on much real help from the Finance Minister - which is what worries business.

Just raising interest rates is a blunt instrument - the proverbial sledge-hammer to crack a nut - just as likely to hit deserving borrowers as undeserving spendthrifts.

Unless Cullen puts his money where his mouth is and tears up the Government's own credit card, we'll all be paying penalty interest after Christmas, no matter how scrupulously we run our own accounts.