Treasury sees faults in Govt policies

Press, 2 September 1983, Page 4

Treasury sees faults in Govt policies

PA Wellington The Treasury has criticised the Government’s policies as being likely to restrict short-term and medium-term growth. The criticisms are contained in a 29-page report on growth prospects for the next 15 years, prepared for energy planners. The report has been made public after a request lodged under the Official Information Act. It said New Zealand’s growth performance in the last 15 years had been poor relative to that of other developed countries. It identified a number of features in the economy during the 1970 s which could have inhibited growth. These were: ® High and widely varying rates of monetary growth which seemed likely

to have been the prime cause of inflation rates typically ahead of those of New Zealand’s main trading partners. © During the decade the Government’s share of national income grew from 29 per cent to 39 per cent. This growth was not matched by a parallel growth in revenues, resulting in bigger budget deficits.

© Fiscal developments did not follow a stable path but were characterised by large swings which were likely to have producers facing increased market uncertainties.

© Attempts by the authorities to maintain activity by fiscal operations and overseas borrowing were likely to have allowed a backlog of necessary adjustments to the economy to

develop after the two oil price shocks. © Significant imbalances in the economy had now built up.

“The correction of such weaknesses as the high Government deficit, New Zealand’s relative inflation rate, the reduced profit share of national income, the balance-of-payments deficit, and the over-valued exchange rate will impose an inevitable cost in terms of achievable growth rates in the short to medium term,” said the report. “On the other hand, the absence of such adjustments and a worsening of macroeconomic trends would undoubtedly impair the economy’s growth performance for a longer period.” The report shows that the Treasury was more pessimistic about New Zealand’s growth prospects than it was last year. It predicts a growth rate of from 1 to 3 per cent over the next 15 years. Last year it forecast from 2 to 4 per cent.

Over the last 15 years New Zealand’s growth performance had been half to three-quarters the growth of other developed countries and painful adjustments were needed if New Zealand’s comparative performance over the next 15 years was to be improved, it said. Prospects for growth among developed countries appeared pessimistic for some time to come. “Since New Zealand’s performance has been consistently below the O.E.C.D. average, an increase in New Zealand’s growth over the next 15 years to about or above the expected O.E.C.D. average would appear to require either a significant movement towards a set of domestic policies more conducive to rapid growth or a significant increase in the rate of growth in world demand for New Zealand’s exports. “In recent years the Gov-

ernment has made some moves towards freeing up the protective structure at the border and reducing , internal regulations, and < continues to emphasise the * importance of reducing ,' internal deficit and control- ' ling inflation. “Recent moves in industry studies which will expose some of the more highly protected industries to international competition, the impact of C.E.R., and deregulation in the transport and other sectors will have positive effects,” said the Treasury. “However, more extensive changes seem required to reduce the probability of continuing comparatively poor performance over the next 15 years. “Many of the changes will also involve painful adjustments, which, because they have been long delayed, will be more painful and therefore difficult to achieve. “For the Government to put in place policies more conducive to higher growth, a supportive social and political consensus which accepted the necessary adjustments would seem essential. “ . . . while the Government may set an environment which is conducive to faster growth, its achievement will depend on the willingness of the private sector to respond, a willingness which may be influenced by social, cultural, and educational factors.” The Treasury report said that in the short term to medium term some growth would have to be forgone to allow the correction of imbalances in the external and internal deficits and other adjustments. An appreciable upturn in the external terms of trade was not expected. Growth forecasts to 1997 for various sectors of the economy were revised downwards in the Treasury report.