THE PRESS SATURDAY, JUNE 2, 1984. Onzbonz and money-lenders

Press, 2 June 1984, Page 18

THE PRESS SATURDAY, JUNE 2, 1984. Onzbonz and money-lenders

When the financial institutions complain about the new issue of “Our New Zealand Bonds” by the Government, a fair assumption can be made: the sale of these bonds is expected to be popular. More than this, they will be popular, and be taken up, at the expense of the institutions’ competitive ability to raise funds from depositors and to lend to borrowers at profitable interest rates. Further, the expectation must be that private borrowers will find it harder to get loans, notwithstanding the attraction, to them, of controls on interest rates. Then comes the political argument about the need for the bonds—the borrowing to cover the Government deficit between tax revenue and total Government spending, as well as the borrowing designed to control the supply of money in the economy. This argument can look rather odd when it appears to provoke tears of sympathy for the money-lenders, though they are publicly shed on behalf of borrowers struggling to get their hands on finance. The rate of interest attaching to the new bonds is twofold: a rate of 5 per cent plus a rate directly indexed to the rate of inflation. At present, the private institutions could match this rate, but only for so long as the rate of inflation does not rise. A promise to pay interest that matches inflation at, possibly, a higher rate in coming months or next year, would be a breach of the interest regulations. The backing of such a promise, even if it could be made, might be very risky. The institutions would have to be sure that they could adjust their lending rates accordingly in the future. Of this, they cannot be sure. In sum, the Government has the private sector beaten on this score. Whether this is desirable depends on where

one stands in the economy. Taxpayers, and those who benefit from Government expenditure, are seldom very unhappy about a Government deficit if it abates taxes and ensures that Government services are maintained. Against their satisfaction with this course, they have to balance two things. One is the likelihood that, as borrowers themselves, they may find money hard to come by; the other is their regard for the other consequence of Government borrowing, which is the restraint on money supply and, therefore, the rate of inflation. For several months the growth in the New Zealand economy has been quite strong, and stronger than most people expected. Economists forecast that, later in the year, the growth rate will taper off. This will be partly because the Government has already taken steps to moderate the money supply. If it fails to keep the rate of inflation under control, the Government will permit what looks like growth in money values, but which in real terms and more particularly employment levels, will mean no advance at all. The battle is still on to persuade the country that inflation can be kept in check. Experience in the last decade runs against ready acceptance of such persuasion. One of the consequences of this unease is the reluctance to accept lower interest rates. Buyers of the new bonds probably feel that the indexed rate of interest will increase in due course. At least this is a kind of security for them. Yet it is another reason why the Government should publicly acknowledge the reality of the economic circumstances after the price and wage freeze and declare that the road out of a thicket of controls will be a long one—years, not months. This declaration could steady many financial nerves, even if the policy does not please the people in the money business.