New Zealand Party economist replies

Press, 25 May 1984, Page 12

New Zealand Party economist replies

Dr Ewen McCann, senior lecturer in economics at the University of Canterbury, chairman of the New Zealand Party’s economics policy committee, and the party’s economic adviser, comments on an editorial, “New party’s economic policy,” which was printed in “The Press” on May

Monday’s editorial took a sceptical look at the economic policy of the New Zealand Party. Scepticism is healthy in an open mind. In the main, the editorial considered the effects which currency depreciation, in conjunction with free wage-bargaining, have on the price levels and on employment. The broad conclusion of the editorial, which will be challenged was that inflation and unemployment would increase as a consquence of the New Zealand Party’s policies. The editorial did point out, albeit sarcastically, that farmers and manufacturers will be stimulated by the Party's policy. It is exactly those stimuli to output in those industries which will raise employment levels. Why does the editorial writer expect the price level to rise? Many prices will not rise. The New Zealand Party’s sales tax proposal lowers sales taxes on many goods. By itself, this factor lowers the prices of those goods. Large numbers of goods bear sales taxes of 37Vz per cent, 40 per

cent and 60 per cent. The New Zealand Party’s retail sales tax of 15 per cent, the same for almost all goods, will substantially lower many prices. Food, medical and educational goods will be exempt from sales tax. Rates on liquor, cigarettes and petrol will not change. There is a further factor which, in isolation, will act to lower prices. This is the removal of tariffs and quotas. That means that New Zealanders, most of them for the first time in their lives, will pay the world price, plus sales tax, for the goods they consume. At present they pay for tariffs, quotas and export subsidies too. Against this, the party acknowledges that floating ' exchange rates, which eliminate balance of payments deficits, will raise the local prices of exported and imported goods. A currency depreciation causes a once-only jump in the inflation rate of about onequarter of the depreciation. Thereafter the inflation rate falls back to its underlying level which, with

sound monetary policies, is low.

Employer and trade union excesses are not unfettered in the New Zealand Party policy. The proposed conciliation procedure places penalties on parties who in the opinion of the courts, go over the edge. Third parties would have rights to sue for losses from industrial disputes. The editorial assumes that a rise in wages raises the price level. That is a chicken-and-egg explanation of inflation. Under what preconditions can prices and wages rise? An important requirement is that there is an excess supply of money available to finance them. For example, the tight monetary growth policy until June 1983 kept wage and price inflation down. Now that monetary policy is loose, wage and price pressures are appearing. Other western countries do not have New Zealand-style wage controls; how have they got their inflation rate down? The New Zealand Party will do it by control of the money base. The New Zealand Party policy shows how the country can obtain sound money. It is by making the monetary base consist solely of Reserve Bank bonds, traded only within the banking system. By allowing the Reserve Bank to trade only in those bonds, monetary control is attained.