October 29, 2009

OCR alone will not rebalance the economy

The Reserve Bank’s reliance on one tool, the Official Cash Rate (OCR), is not sophisticated enough to rebalance our economy onto a more sustainable, productive footing, said Green Party Finance Spokesperson Russel Norman today.

“We need more tools than the OCR to respond to the complex set of economic challenges we’re facing,” said Dr Norman.

The Governor’s decision to hold the OCR at 2.5 per cent today will keep interest rates low adding less fuel our currently over-valued exchange rate. However, lower interest rates will encourage further speculation in the housing market to the detriment of the tradable sector, demonstrating the limitations of using one tool to achieve the Reserve Bank’s desired outcomes.

“The Official Cash Rate by itself does not work to promote a vibrant, diversified, and productive economy,” said Dr Norman.

“Our current tax system encourages a disproportionate amount of our wealth to be invested in non-productive assets like property. A capital gains tax on any property investment excluding the family home would help restore some balance to the way New Zealanders are encouraged to invest.”

“We also need to look at putting limits to the tax write-offs property investors are able to claim through loss-attributing companies and the like.” Losses on LAQCs, used to offset tax, have increased from $750 million in 2003 to $2.3 billion in 2008.

The productive sector in New Zealand has been in recession now for the last five years due to an overvalued exchange rate and difficult borrowing conditions.

“We need a suite of new tools to revitalise the productive sector to enable us to earn our living by what we produce rather than by what we borrow,” said Dr Norman.

“We may even need to consider more specific measures targeting bank lending behaviour. For example, by increasing the amount banks need to hold in reserve for lending in asset bubble prone sectors like housing, you effectively limit the amount of borrowing in that sector.”

“This is a more direct way to encourage lending to small-to-medium sized businesses than mucking about with the OCR. Evidence provided to the Parliamentary Banking Enquiry showed that lending to business has dropped $3 billion in the first nine months of this year while lending to housing increased by $3 billion. This is the exact opposite of what’s needed and we need to look at tools we can use to incentivise bank lending towards the productive sector.”

Link to the Parliamentary Banking Enquiry:
http://www.bankinquiry.org.nz

ENDS

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