Tax changes essential— Reserve Bank head

Press, 8 May 1985, Page 9

Tax changes essential — Reserve Bank head

Public debate on tax reform had tended to generate more heat than light, said the Governor of the Reserve Bank, Mr Spencer Russell, in Christchurch yesterday. This was disappointing as the case for reform was clear and, he suggested, supported by most in the community.

. “There can be little doubt that the present system has faults. It does not sufficiently encourage innovation, effort, or productive investment,” he said. The heavy reliance on direct or income tax meant that the over-all burden fell unfairly on low-income to middle-income wage and salary earners. It inhibited incentive and encouraged evasion at higher income levels, he said. “If we seriously wish to correct this distortion and introduce a greater degree of equity into the contribution we make to the cost of conducting our Government, a substantial shift to a system based on indirect and expenditure-based taxation seems essential,” he said.

Mr Russell said such a shift would certainly affect prices but he would not expect any sustained impact on inflation.

The key to controlling inflation was a tight monetary policy. Calling for restraint in the forthcoming wage negotiations, he said that without such a policy higher wages could bring" higher prices and reduced opportunities for employment. Last year’s Economic Summit conference recognised that unless increases in labour costs were better matched to productivity growth, it would be difficult to expand employment to any significant extent. He warned that restraint should also be made by the business sector so that prices were kept down. Companies which ignored this would probably find difficulty surviving in a more open and competitive economy, to the disadvantage of their shareholders, their management, and their staff. Mr Russell commended

Government moves to improve New Zealand’s economy.

Basic changes would provide the sustained growth on which recovery and improvement in New Zealanders’ standard of living depended. However, a series of policy moves by the Government indicated recognition of the immediacy of the problem. This included freeing the exchange rate and deregulating finance.

“Moreover, the Govern-

ment has tackled the task of reducing the Government deficit and has implemented a very firm monetary policy to restrain the growth of money and credit to manageable levels and thereby reduce inflation in the medium term,” Mr Russell said.

An economy as open, as New Zealand could not expect to isolate itself from the realities of the world’s marketplace. A full market philosophy should be adopted and, as a marketing country, New Zealand must meet the demand of the market domestically and internationally, he said.