THE PRESS SATURDAY, DECEMBER 10, 1983. Finding the money

Press, 10 December 1983, Page 20

THE PRESS SATURDAY, DECEMBER 10, 1983. Finding the money

The Government’s monetary policy is a very fragile part of its manipulation of the economy. It has long been apparent that the Government has had to devise more imaginative methods of marketing Government securities to raise loan money. Attracting loan money would not necessarily be so difficult were it not for the restraints imposed by the battle against inflation. Even more ingenuity in selling Government stock might be needed if the Minister of Finance, Mr Muldoon, is to achieve the wider aim of covering the large Budget deficit in the least inflationary way.In his role as Prime Minister, Mr Muldoon has declared the battle against inflation to be the Government’s most important task. As Minister of Finance, he has had to wage this battle in part by exerting control on money supply. At the same time he has had to raise loans to cover the Budget deficit. Mopping up excess liquidity as an anti-inflationary measure is a little easier when controls are laid on prices; but keeping interest rates down and attracting deposits is tricky.

So far the Government has offered three lots of stock for investors’ tenders. The second was acknowledged by the Associate Minister of Finance, Mr Falloon, to be unsatisfactory; some bids were accepted, even though they were for interest rates not in keeping with the Government’s anti-inflation aims. The third stock tender, last month, failed to meet its target. Only $143 million of the $4OO million worth of stock offered was taken up. These are clear warnings to Mr Muldoon that he will not have it all his own way in raising the money he must raise at the interest rates he would prefer to pay. The tendering system for Government stock has already been modified substantially to try to overcome the problems encountered as a result of the Government’s insistence on reducing interest rates. The open-market approach to bidding runs up against the attractions of other investments, including the sharemarket. Further changes have been made as a result of the failure of the third stock tender. Now an index-linked bond will be introduced as a concession to the investment market’s view of the likely rate of inflation, which is a gloomier view than that held by Mr Muldoon. Interest paid on this stock will be adjusted to take account of increases in the Consumers Price Index; in other words, interest rates on this stock will contain an element of insurance against inflation. This must have been an uncomfortable step for Mr Muldoon to take. He can say that the built-in inflation adjustment will be of little consequence because his policies will control inflation and that it is a confident gesture to allay fears; he cannot say that the bulk of the investing community agrees with him, though it may cheerfully accept the insurance offered. At best, it can be said that investors are uncertain about the future rate of inflation. At worst, they do not accept that the reduction in inflation during the freeze on incomes and prices is anything more than transitory. To the extent that the Government has been forced to concede an inflation adjustment on future stock tender interest rates, it has been forced to admit that its • public estimates on future interest rate levels are not sufficiently convincing.

Somewhat strangely, the smaller investors, who already have inflation-adjusted bonds as an outlet for savings, appear to be more confident that inflation will be contained. The popularity of the established inflation-proofed bonds has waned with the present reduction in the measured rate of consumer price rises. Lately, the bonds are being redeemed at a faster rate

than they are being taken up. In recent weeks more than $4 million a week has been withdrawn by people cashing in the bonds; during the same period the bonds have attracted investments of less than $1 million a week.

The Reserve Bank is paying out more than it is taking in and this is adding to the Government’s difficulties in financing the $3200 million deficit. This, too, fuels the Government’s need to attract private savings — and to sell off its debt for a while — in other ways. Investors are also withdrawing their funds from Kiwi Savings Stock at a rate faster than the stock is attracting money. In the four months to the end of October, redemptions of KiSS stock exceeded investments by almost $lOO million. Some of the redemption of Government securities might be by investors who have an urgent need to use the money elsewhere; most of it, however, appears to be a result of lower inflation making other forms of investment comparatively more attractive. In the long run, the redemption of inflationadjusted savings bonds will remove a potentially sapping debt burden; in the short term, the drain on funds is an embarrassment to the Reserve Bank and to the Government.

Mr Muldoon might hope for continued success in talking and regulating interest rates downwards. One effect of the reduction in interest rates during August was to slow the flow of redemptions from the first KiSS issue; continued control of interest rates might improve the attractions of the second issue that has had nowhere near the same appeal. Be that as it may, the Government has made no move to refine or liberalise the conditions of subscription to the existing inflation-adjusted bonds to slow the rate of their redemption, or to increase their sale. If private investors can be induced to put their money into other Government securities, so much the better for reduced debt servicing later on; but if the money is being diverted to investment other than with the Government, the resulting pool of capital will itself be an impetus for inflation.

The new, index-linked bonds that will be offered by tender should prove attractive to the financial institutions and the larger private subscribers at whom it is directed. Significantly, the Government has reduced the minimum amount of stock on which tenders will be accepted from $20,000 to $5OOO. This should widen considerably the range of potential tenderers. Whether the introduction of this more attractive security will prove sufficient to capture the funds that the Government needs remains to be seen. If necessary, the Government could turn to other avenues, though they would not necessarily be popular ones. It has had to shut one revenue door: income tax. A politically acceptable exit from price and income controls demands that the door will stay shut.

One course of action, for instance, would be to increase the Government security ratios that are imposed on various financial institutions, thus forcing these captive investors to divert a greater proportion of their funds into Government stock. This would help to neutralise the monetary impact of the Budget deficit, but it would also diminish even further the money available for such things as mortgages, the demand for which already outstrips the funds available. The finance market would prefer that further regulatory controls are not necessary; Mr Muldoon himself probably hopes that the latest measures will be sufficient. The financial year is almost threequarters spent. He is running out of time for much more tinkering and still has to contend with the removal of the freeze.