THE PRESS SATURDAY, MAY 12, 1984. Long haul to end controls

Press, 12 May 1984, Page 18

THE PRESS SATURDAY, MAY 12, 1984. Long haul to end controls

In spite of the apparent impulsiveness of the Prime Minister, Sir Robert Muldoon, he cannot lightly be accused of failing to do adequate research, or homework, before he makes decisions on economic matters. His decision this week to restrain the volume of lending by finance houses — part of a more general policy to restrain interest rates and to contain the rate of inflation — would not be taken lightly and was not made without warning. Sir Robert must have made assumptions about the effects of the restraints on lending in the Government’s wider policies of restricting inflation and improving employment; and he must have decided that, on balance, more will be gained than lost. Many others will not be readily persuaded that he is right. The Government is loading the community with further regulations and restraints. After 18 months of a freeze on prices and incomes, New Zealand’s rate of inflation was reduced to a level that compared favourably with the rate in almost every country in the world. Yet few would seriously believe that, unfettered, the economy today would automatically stabilise prices or prevent another inflationary spiral. Expectations remain that inflation is likely to increase again if regulations are eased. Sir Robert does not deny this; in fact, he confirms it when he has to deal with interest rates. Pressures for higher rates of interest reflect these expectations, and he is trying to reduce the pressures. Regulations to restrain interest rates — to borrowers and lenders — are not unreasonable if they are going to secure a climate in which higher inflation is no longer expected. They will never be the sole instrument in achieving this goal. Restraints on interest and on the volume of lending cannot be imposed in isolation any more than restraints on wages can be fairly imposed in isolation. Restraints on the interest that can be earned by lenders limits the volume of money coming forward — especially when one major consumer of funds, the sharemarket, remains an unregulated alternative for investment. The buoyancy of the sharemarket indicates that, at present, many people who have surplus funds regard shares as the more attractive investment. Fixed-interest investments are being treated only as short-term repositories for money. This is bad news for investment in business growth. Short-term lending means refinancing at uncertain rates of interest, a discouragement and danger to new enterprises. At some risk of increasing the money supply, the Government may have to enable such State institutions as the Development Finance Corporation to increase lending to business and to help set the pace for longer-term interest rates. Inflation is not the only serious economic disability in New Zealand. Opinion polls, quite fairly, show that the greatest public conern is the high level of unemployment. If economic activity is to increase sufficiently to make useful inroads into the numbers unemployed, ready access to credit is essential. Lower interest rates, achieved by Government regulation, help to provide cheaper money to expand the economy. Lower interest rates are no use if lenders are discouraged from coming forward, if institutions cannot attract the funds that they need to lend at rates acceptable to the Government. Lenders must be given compelling reasons to believe that the inflation rate will be steady and that better rates of interest are not just round the corner. Here lies the dilemma

for economic managers. When many sections of the economy are restrained by regulation, or have their levels of activity and income maintained by regulations and subsidies, it must seem unreasonable to exempt from control those who have money to lend. In New Zealand, almost everyone is a borrower in some way — through mortgages, hire purchase, and a variety of other avenues. All have at least some cause to prefer low interest rates on this score. Many of the same people are also lenders, through life insurance policies, superannuation funds, building societies, and savings accounts. They have lent with the expectation of a reasonable return on their money, and often with the expectation of being able to borrow readily against their savings. Any restraint must be unwelcome. Onerous rates of interest are, of course, a restraint that is just as unwelcome as a managed shortage of loan money. The dilemma becomes more profound; but a decision must be made to minimise the hurt caused by inflation and unemployment. The latest measures from the Government show that, although the freeze may have been a success in restraining inflation, easing out of the freeze is no easy matter. Most incomes remain controlled; price increases are curtailed; a matching restraint on interest and credit might seem fair, but it will work to dampen economic activity and to frustrate increased employment. The State stands to benefit from the regulations, at least in the short term. Forecasts of the Government’s deficit, the difference between spending and revenue from taxes, have been reduced from the $3.2 billion announced in last July’s Budget to something like $2.85 million. By restraining interest rates elsewhere, the Government is deflecting money into State loans at rates lower than it would otherwise have to pay. For taxpayers, faced with helping to finance the State deficit, this may seem an admirable outcome. The price has still to be paid in economic distortions and in uncertainty about how the freeze regulations may finally be abandoned. A tricky balancing act is being performed, and one against which much criticism can be directed if only one point of view is adopted — the view of the taxpayer, of the borrower, the lender, the worker on controlled pay rates, the shopkeeper, house buyer, or the business trying to expand. Part of the difficulty for all lies in uncertainty about the future. Once the freeze was imposed, the predictions that ending it would be difficult were almost universal. The Government was among those making such predictions, but went confidently ahead with the freeze. One thing is becoming increasingly certain: near enough to two years of rigid control will mean a long period of readjustment, not months but perhaps two or three years. This is the price of the freeze. Sir Robert would probably do everyone a service, especially those in financial circles and their clients, if he were to acknowledge the likely length of the period of adjustment. Politically, in an election year, the Government would prefer to declare a swift return to a more free economy. In practice, the financial climate would almost certainly be better if the long period of getting rid of the controls were clearly acknowledged. In practice, it seems certain that no political party can safely remove controls. Public awareness and acceptance of the timetable would at least have a steadying effect on the financial scene and might remove the need for still more restraints.