NZMEA: Balancing the books but not the economy

Balancing the books but not the economy - 20 May
NZMEA
NZ Manufacturers and Exporters Association
http://www.nzmea.org.nz/

The Budget has targeted balancing the books but missed out on balancing the economy by sparking growth in the tradable sector say the New Zealand Manufacturers and Exporters Association (NZMEA). The Budget focused on cutting costs through cuts to Kiwisaver and Working for Families, but had little detail on how to increase growth or shift the balance of the economy towards savings and exports as the Government has talked about.

NZMEA Chief Executive John Walley says, “Rebalancing rhetoric is almost a fixture in New Zealand politics, it is effective rebalancing action that is absent. We have a one-dimensional text book on monetary policy driving a volatile and overvalued kiwi dollar and fiscal policy that rewards investment in assets, not activity in the tradeable sector. Until that is fixed high growth will be just be a forecast not a reality.”

“The Budget noted that higher growth rates had been seen prior to 2005 and the growth forecasts are reliant on these conditions returning and it is debatable if the higher growth back then was all that real.”

Traded/Non-traded Sector Growth

Budget 2011

“This graph from the Budget document shows that the tradable sector has contracted since 2005. This changes the outlook for growth as there is unlikely to be much export pick up with the exchange rate where it is at the moment.”

Real Exchange Rate Index

Budget 2011

“My question is unless we get more investment in the tradable sector where will this growth come from? Lower these forecasts to the average post 2004 growth rates and we will not see a surplus this decade without significant cuts in the future.”

Real Gross Domestic Product Growth (percentage change)

RBNZ

“The allocation of an earthquake fund and the changes to foreign bank taxation will deliver some benefits, but reducing incentives to save seems to act against the Government’s stated intentions. The partial asset sales of Solid Energy and Air New Zealand will also help but the sale of natural monopolies is more debatable In any case the $5 to 7 billion quoted is fairly immaterial against GDP over the forecast period.”

“Cost cutting is part of solving the deficit problem but earning more should be a priority.”

To achieve higher growth the Government needs to:

• Stabilise the high and volatile New Zealand dollar;
• Reform the tax system to promote investment in the tradable sector over speculative investment in land and buildings; and
• Introduce productive investment incentives.

“Much more effort in these three areas would start to address New Zealand’s economic underperformance,” says Mr Walley. “The OECD, the IMF and the Government’s own working groups have agreed that a step change in policy is needed; tinkering will not get the job done.”

ENDS

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