Dialogue: Dollar's drop hard on mums and dads

By BILL ENGLISH*

Keith Rankin, like the Government, seems to be more interested in theories than their effect on people. He takes issue with my comments that the low dollar means that someone ends up poorer.

He doesn't rebut my argument that a low dollar means a lot of people will become poorer; he shows that sometimes economies grow after a devaluation, which is just an apology for bad economic management.

You can argue that a good, sharp devaluation is just what New Zealand needs, and that we will grow again. This overlooks the issues of why it happened, who pays in the meantime, and whether we could have avoided the pain.

There is no doubt that New Zealanders will be worse off as a result of the low dollar - it's just a matter of how much worse off and for how long. When we fill up the car, or buy a car, or buy school shoes it will cost more. Our bright young people looking overseas for opportunities have just seen the difference in income rise again and leaving looks even more attractive.

The problem for Mr Rankin, and for Michael Cullen, is that in theory almost any economic adjustment is a good thing in the long run, it's just the people who are a problem. You can cut Government spending, or raise taxes, or abolish tariffs in a big way, but each one affects people. The trick in government is to get the long-term adjustments without more pain than is absolutely necessary.

New Zealand has been importing too much, not exporting enough and building up debt to foreigners. Because the previous Government stuck to consistent, credible policy, as recently as the Budget in June the new Government and the markets thought the exchange rate would rise past the mid-50s. We almost had the right recipe - rising exports, falling imports, stable exchange rate, consistent interest rates, rising employment. There was plenty of confidence that the economy could grow well for some years.

The Reserve Bank says we will lose $1.5 billion of growth over the next six months and that's a lot of jobs lost. It didn't need to happen. We could have had the adjustment at a higher exchange rate, in the US50c range, and a lot less pain from rising costs of living.

Bad management by Dr Cullen has greatly increased the pain because it has dropped the exchange rate a lot lower than it needed to go.

No one thing the Government has done is responsible but most things it has done have contributed. The Government keeps saying it's nothing to do with it, but everyone else says it is. Local business and overseas investors and New Zealand mums and dads have lost confidence, and that's already cost $1.5 billion of growth the Government expected to have.

Whatever the Government thought it was doing, it has made matters worse and it will cost New Zealanders. The people on the sharp end will respond by looking for higher wages as is already evident with a 20 per cent-plus claim from the firefighters.

The Reserve Bank has been given a job by the Government to keep inflation down, and Governor Don Brash has said he intends to do the job he has been given. That means if wage claims go too high and there's more inflation, he will push interest rates up.

That might mean a recession. We'll certainly grow after a recession - just look at how much the economy grew in 1999 after the Asian crisis in 1998. That doesn't mean it was a good idea. That's not what Helen Clark was elected to do, but it looks like it could happen now. Six months ago, no one imagined the possibility.

So Mr Rankin and Dr Cullen and Helen Clark might sit idly by, pleased with their handiwork - turning a full-blown economic recovery into a mild recession. Perhaps in 10 years we will think it was a happy accident, but the people whose household budgets get squeezed because of incompetent economic management might not be so pleased about it.

* Bill English is National's spokesman on finance.