Inflation is devastating, warns farmer-economist

Press, 4 June 1982, Page 16

Inflation is devastating, warns farmer-economist

The subject of this year’s provincial.conference of North Canterbury Federated Farmers was inflation, that “comfortable disease.” Speakers were Mr Tim Saunders, an Auckland economist and businessman, and Mr John Bayley, a farmer from Rangiora and chairman of the Fernside branch, who was an economist for the Bank of New Zealand head office in Wellington before returning to farming. Mr Bayley has diplomas in agriculture,

rural valuation and farm management and a degree in agricultural commerce and economics. He gave the address to a provincial executive meeting before repeating it before the annual conference. He spoke with great intensity, punching out an uncompromising message. His address is here reproduced in full (in two consecutive parts) because of its unique genesis in the combination of farmer and top economist, and its clarity.

The long-term ability ol this nation to prosper is becoming severely impaired by the . current inflationary trend, Mr John Bayley, farmer and economist, told the recent annual conference of the North Canterbury Federated Farmers. "As a nation we are tending to lose sight of the need to combat inflation,” he said.

“It is not being kept in front of the population ol New Zealand as a principal economic objective." Mr Bayley went on to say: “I think it is becoming submerged under a school of red herrings, including such things as Think Big, aluminium smelters, C.E.R., S.M.P.S, and not to mention the redundant tea lady. These red herrings are mere symptoms of our inflationary predicament. S.M.P.S are obviously a prime example.

Inflation in New Zealand as measured by the consumer price index was 15.8 per cent in the fiscal year to the end of March 1982.

That figure has been steadily rising over the last 12

months, and, as alluded to by our president (Mr Mulholland) that figure is considerably greater than the average of our O.E.C.D. trading partners. We haven’t been in single digit inflation since the later half of 1973.

That means that we are approaching a decade of inflation at something over 10 per cent and indeed the O.E.C.D. themselves predict that New Zealand will have an inflation rate in this coming year of something like 16.5 per cent.

There is no need for me to emphasise the importance of that to us as farmers. Our farm input costs increased something like 20 per cent last year and something like 23 per cent the year before and all in cases in recent years it has been considerably higher than inflation as measured by the C.P.I. Under current product price trends I am quite sure that those increases are not sustainable in the long term and ! am certainly beginning to think they are not even sustainable in the short term, particularly with current adverse climatic conditions.

It is currently very easy to discern the harmful effects that inflation is having on New Zealand First, the distorted pattern of distribution of national income.

The phenomenon where the rich get richer because they have the financial capacity to speculate and capitalise on inflation. The situation where real income gains are not necessarily realised by the individuals and sectors who earn them. Rather they are realised by those factions who have the more political clout to get hold of them, and the freezing industry would be a fairly classical example of that.

Second, the rapid divergence between the productive value and the market .value of real assets. As the confidence in money is eroded people resort to buying real assets as a store of their monetary value, and we don’t have to look much further than land prices to see evidence of this.

Third, there is a market disincentive to save under inflation.

Inflation upgrades any in- ' dividual’s propensity to consume his income on goods and services. The phenomenon of “buy now before the price rises” is obviously rife in our country. ■

And when real interest rates are negative, meaning less than inflation, and that is the situation with most of the small deposit rates at the moment, there is obviously little incentive to save. In fact the converse applies and there is a major incentive to borrow.

But the regretable thing in the economy is that for every borrower there must be a saver and when an economy is in equilibrium savings equal investment.

And thus while we have a marked disincentive to save this is also going to be reflected in the level of national investment and we don’t have to look very far at the dismal performance of New Zealand’s investment over the last decade, both in the absolute amount and in the stop-go nature of it, to realise the importance of that.

And obviously when there is a shortfall in investment in the economy we have to borrow, and you don’t have to look very far to see the phenomenon of overseas borrowing in the New Zealand economy in recent years. Fourth, the markedly deteriorating balance of payments situation.

Our overseas exchange transactions have been in deficit since March 1974,. on an annual basis, and that is certainly the longest period we have been in deficit postwar. Currently it is something like 51000 million and it is expected to deterioriate to $l5OO million this year.

Obviously when we have a sustained deficit over a number of years the pressure is going to come on our exchange rate and the New Zealand dollar has ■ been down 15.9 per cent since the basket measure was introduced in June 1979. As a citizen' of New Zealand I certainly don’t relish the thought of us continually devaluing our way to oblivion. All these deleterious fac-

tors are • present in New Zealand at the moment. They are very evident and they are very real. Their long term effects will be devastating unless the inflationary trend is reversed. To date I find the Government’s performance in the sphere of inflation to be quite deplorable.

In the aftermath of the election I am very fearful that inflation has faded from the official priorities and I am fearful that the Government regards its election win (by default) as a mandate to continue with the same policies as they had through 1980 and 1981.

And I see it as really imperative that the Government leads in concentrating the attention, of the nation on inflation, and the absolute necessity for its reduction. It is beyond the aims of this dissertation to outline a comprehensive package of

anti-inflationary measures but what I would like to do is concentrate on two fundamental issues highlighted by the O.E.C.D. report released in February this year. They are the need for. a real increase in aggregate productivity and a considerable lessening of the role,of the Government in the economy.

Government expenditure as a percentage of gross domestic product in 1974 was 29 per cent and in 1981-82 it is estimated to be 38.5 per cent. Over the last decade this represents a massive increase in the Government’s role in our economy. As an elector who helped vote this Government to power on a platform of private enterprise and competition, I certainly detest that situation.

Looking at the current situation, having spent some time at the centre of New Zealand’s financial sector in

Wellington, I am certainly very aware of. the very critical nature of Government expenditure, in terms of the absolute amount and timing, especially in an economy subject to seasonal influences.

I would have thought that this Government would have been more politically responsible than to succumb to the usual election year spendups, as they did last year, at a time when restraint would have been much more responsible. The slack monetary and fiscal policies during 1981 are amply evidenced in the growth of the money supply for the third quarter of 1981. There was a 22 per cent growth in Government expenditure on an annual basis in the nine months to December 1981.

As farmers, some years ago, we acceded in good faith to farm income stabilisation as a method of averting the undersirable national surges in consumption, and now it is very- disquieting from a farmer’s point of view to find the Government precipitating that exact situation itself through its own irresponsible pattern of expenditure. As a consequence the nation is now suffering a particularly tight non-sea-sonal liquidity situation as the Government struggles to finance an estimated $2OOO million deficit.

Regrettably this has necessitated the reintroduction of political interest rate controls and that is a complete reversal of the measures that were introduced in March 1976.

That monetary package in 1976 was probably one of the most positive steps forward in the monetary policy of this nation, and certainly one of the major structural changes the Government has made during its term of office.

I cannot comprehend the official ambivalence on the. necessity to revert to this situation having made such a positive stop forward in 1976. I can only conclude that officialdom’s attitude to market interest rates goes something like this: ‘There is nothing wrong with marketoriented interest rates as long as someone else is paying them and as long as I am not in the money market trying •to finance my $2OOO million deficit.’

I will be looking at the forthcoming Budget for the projected level of Government expenditure.-1 won’t be looking at all the platitudes in the front, for they have long • since lost their credence, but turning to table two in the back depicting the financing of Government expenditure. The annual percentage

change in expenditure will illustrate to me the commitment of this Government doing something about inflation.

I will acknowledge they have certainly made inroads in their expenditure during the 1981-82 year, for example in the housing sector, but the annual rate of change in expenditure must be less than the inflation rate if we are to see a reduction in Government expenditure in real terms.

And that will require a lot more than a paltry 3 per cent, as 3 per cent of last year's budgeted Government expenditure is around $327 million, less than a sixth of the S2OOOM deficit. The other side of the coin is Government revenue, principally taxation. We have just had a Taxation Commission, which has certainly done some good in the manner of taxation, but regrettably the absolute level of tax was outside the terms of reference of that commissison.

The nine-month Government accounts, to the end of December, show income tax has increased at a rate of 28 per cent, and that compares with an O.E.C.D. estimate of a rise in fiscal income of something like 20 per cent.

Therefore the tax take in real terms continues to rise, and that means that the phenomenon of fiscal drag is operating, and very strongly.

I am convinced that the Government has to relinquish that fiscal drag if we are going to make any inroads into controlling inflation. Fiscal drag remains a major disincentive to individuals and the private sector to increase their productivity when Government assumes an increased proportion of their earnings through taxation.

This is not only income tax but company tax. Companies declare profits on accounts based on historical costs, and generally those money profits are overstated and distorted through inflation. They are generally not sustainable in liquid terms, and in other, words those profits are very much illusory profits, but nevertheless they are profits, which Governments assess tax on, and they are also profits which look very attractive for unions to ’ claim wages against.

If the Government is going to relinquish rear increases in tax, then obviously from a company point of view it must be prepared to tax on some form of inflation-ad-justed accounts. That is going to remove the distortions of things like inflated stock. values and.arbitary depreciation rates.

And thus I see as simultaneous commitment by the Government to a reduction in both real expenditure and taxation as a necessary prerequisite to containing the annual inflation rate. : 1

I shall be focusing closely on this year’s Budget as an indication from those up there in ‘fantasy land’ on just how strong their political resolve to combat inflation really is.” . .