Economic policychanges suggested

Press, 7 May 1980, Page 5

Economic policychanges suggested

PA Wellington The present approach to economic policy has probably encouraged inflation, produced uncertainty, and delayed the adjustment to the overseas deficit, two economists have said in a report. The Reserve Bank’s chief economist, Dr Rod Deane, and a Reserve Bank research officer, Mt Richard Smith, prepared the report, “The Stabilisation Role of Fiscal Policy,” for the Planning Council. The council will use it as an independent report on public spending options for the 1980 s. A longer-term view on economic policy formation was essential, the report said. There appeared to be ample scope “to improve the stabilisation role of fiscal policy, not by pursuing widely divergent outcomes each year in response to our most immediately pressing problem, but rather by adopting more consistent and less variable policies directed towards a set of agreed and maintained med i u m-t erm economic objectives.” The approach has “too often been ad hoc” and the effects policy changes had on the economy seemed to have been given little consideration, the report said. So had the great length of time it took for these effects to work their way through the system. The authors called for a “coherent,' and planned array” of Government policies which would take a three to five-year view of the economy. “The .swings in fiscal policy in recent years suggest that such an approach has been sacrificed

to shorter-term considerations and, indeed, even the relative weights attached to these issues have varied greatly within quite short time spans.” ' The report examined how a Government could best fight inflation, maintain economic growth and achieve “other policy goals,” such as full employment. Among their recommendations, Dr Deane and Mr Smith called for income tax rates linked to the rate of inflation, a reconsideration of automatic increases in public servants’ pay rates, and tighter controls by the Government on its own spending. The report said the impact of the Government’s monetary policies depended on tlie. state of the economy, the restraints on the economy caused by the balance-of-payments deficit, the nature of the x ilicies, and the time they took to have effect. In the mid 1970 s the economy was upset by a “massive” rise in oil prices and a decline in New Zealand’s terms of trade. Before then budget deficits changed only mildly from one year to the next but after, deficits fluctuated considerably. The deficit in 1975-76 was $lOOO million. In 1976- it was half that amount, $5OO million. In 1977- it was back to $7OO million, and in 197879 it doubled, standing at $1450 million. As a result, monetary policies shifted as the Government attempted to deal with the immediate problems. The authors suggested there were long lags between the time policies were implemented and the

time they began to take effect, “As the underlying nature of New Zealand’s problems has remained unchanged for some years the shifts in fiscal policy have been too wide and too sharp,” they said. The authors called for indexation of income tax so future wage increases would not lead to automatic increases in Government revenue, saying indexation could force the Government to consider more carefully how it spent its money. They pointed out, however, that a “considerable part" of the Government’s spending was automatic. Thirty per cent, they said, went on public servants’ wages. As these rose automatically in response to private sector wage rises, it not only increased Government spending but added to private sector wage pressures, aggravating inflation. The report warned that New Zealand had to learn to live with economic fluctuations from outside New Zealand, saying they greatly complicated economic management.