THE PRESS WEDNESDAY, NOVEMBER 26, 1980 Time for cautious optimism?

Press, 26 November 1980, Page 24

THE PRESS WEDNESDAY, NOVEMBER 26, 1980 Time for cautious optimism?

A month ago the Prime Minister remarked that the Government would be justified in taking risks to stimulate economic activity because New Zealand’s prospects in the longer term, from 1982, look promising. Last evening Mr Muldoon spelt out in some detail the policies, and the risks, for the next year or more. The Government is going to risk the inflationary .effect of an increase in State spending with the objects of improving job opportunities and. training, and of maintaining and stimulating economic activity. Humanitarian considerations apart, the Prime Minister justifies this approach by the need to maintain a sound economic base for expansion later in the decade. This optimistic view of New Zealand’s prospects deserves support. Lethargy, and a sense that the country’s difficult financial circumstances can only get worse, have been growing. A burst of optimism now would help to justify its own forecasts by changing people's attitudes. There remains much room for doubt about the detail of what is being done, and what has been proposed

Export incentives have worked well in some areas of production, less well in others. A price has had to be paid, for the incentives amount to a subsidy from taxpayers on the price which overseas buyers pay for many of New Zealand’s products. Concentration on energy projects, further endorsed by Mr Muldoon last night, does not have universal support. although opponents have still to put forward workable alternatives for development. The new economic package should give a further modest stimulus to production and to exports, although the benefit of many measures—in forestry, irrigation, and further training for school leavers, for instance —might not be felt for years. More important, most of the measures proposed to stimulate productive employment should not bring a further drain on foreign exchange.

As far as possible, the intention appears to be to have New Zealanders produce more from their own resources. The intention is admirable: the increase in spending power from wages and tax cuts should give a boost to some of the most depressed areas of the economy. In due course, however, there must come an increased demand for imports. Things to buy have to be available if people are to be encouraged to work.

The assistance promised for small businesses is a particularly important part of the package. New Zealand has, traditionally, been a country in which much wealth and progress has come from the initiative of small businessmen. The present Government has. on occasions, appeared to be unduly impressed by large-scale enterprises. Details of the scheme to help smaller enterprises are still to be announced bj r the Minister of Trade and Industry. Thev will be awaited with interest

The cuts in personal income tax, although welcome, are less likely to achieve the Government’s intention. Mr Muldoon has said he expects the effects of the tax cuts on take-home pay “will be taken into account in the determination of wage increases next year.” At most, the increases in pay from February 1 will amount to about $7 a week, hardly an adequate incentive to restrain wage demands.. The tax cut amounts to an effective wage increase of about 3 per cent, something to be taken into account in any hearing for a General Wage Order, but little more than a token increase when measured against the rate of inflation.

The timing of the tax cut is more important than its limited effect on individuals and families. It should provide a stimulus to spending in the period after Christmas when retail sales are often seriously depressed. By then, new programmes to support employment might also be having an effect on purchasing power. If all goes well, a modest improvement in economic activity might be under way in the next four or five months. A balance has still to be found between training (or retraining) and work. Some would argue that too many skilled people are out of work now. It is', jobs, not more training, which are needed most.

The whole programme remains vulnerable to a decline in New Zealand’s terms of trade. A modest increase in the price of imported fuels, or a modest decline in receipts from exports, could quickly undo the potential good. The plans to increase the skills of the labour force will only bear fruit if there ‘is. indeed, a significant increase in economic activity by the end of next year. Retraining workers, and speeding up the development of energy resources, only makes sense if New Zealand is assured of long-term enterprises which can use the skills and extra energy to contribute to the country’s wealth.