OCR Cut Welcomed: Gov Budget Action Next Test

Media Release
30 April 2009

Reserve Bank move Welcomed: Government Budget Action The Next Test

The New Zealand Institute welcomed the Reserve Bank’s decision to cut the Official Cash Rate by 50 basis points to 2.5%, despite some predictions that it would cut the rate only to 2.75%.

“The use of monetary policy to stimulate the economy is important because it takes the pressure off using excessive fiscal policy. This is important because there are increasing constraints on the government using fiscal policy to stimulate the economy given rising government debt levels.” said the New Zealand Institute’s spokesperson Benedikte Jensen.

The extent of the worsening fiscal position was highlighted in a New Zealand Institute article released yesterday, ‘Not just a case of a passing ‘Recessionary Flu’: The Budget must also address an underlying lack of economic fitness’. The Institute called for action in the Budget and proposed principles that should drive New Zealand’s fiscal strategy and be reflected in the 2009 Budget to be released on 28th May.

With the Reserve Bank taking some of the immediate pressure off the economy, the Institute believes the focus now should be on the Budget seizing the opportunity to reposition New Zealand in the world economy by using the recession to ‘re-launch’ the country as a magnet for business and talent and halt its decline down the OECD income rankings.

In its latest report the New Zealand Institute called for action for the government not to take a defensive safe approach in the Budget but to show leadership by: putting on the table measures on both the spending and tax sides of the budget ledger (including cancelling the 2nd and third tranches of the tax cuts); and addressing structural imbalances that have led to chronic underinvestment in productive assets.

“One of the benefits of getting on top of those imbalances is that it will help improve the operation of monetary policy in the future, avoiding the large swings in house prices that have led to an unhealthy mixture of tight monetary policy and high exchange rates choking off growth at the peak of the economic cycle, and giving even more room for monetary policy to support growth during recessions”, said Benedikte Jensen.

ENDS

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