Mr Douglas again warns of tariff cuts

Press, 13 July 1985, Page 8

Mr Douglas again warns of tariff cuts

By

MICHAEL HANNAH

in Wellington Record inflation has rekindled Government warnings that manufacturers may face tougher competition from imports to restrain price rises. The Minister of Finance, Mr Douglas, yesterday took on critics of his economic policies and of the latest quarterly inflation rate of 5.1 per cent in June, the highest rate recorded in 38 years. Addressing financiers in Wellington, Mr Douglas blamed the buoyant economic conditions of the last year for allowing manufacturers to pass on costs more easily than the Government had expected. He implicitly rejected criticism in economic circles that the Government was to blame for the buoyant conditions by failing to control the money supply. Mr Douglas predicted his policies would “in good time result in permanently lower levels of inflation” and cau-

tioned against reading too much into money supply figures while financial institutions adjusted their business to more competitive conditions. He then turned the argument against the private sector: “I want to underline as strongly as I can today the message that Government policies are consistent with a lower rate of inflation, but the transition will crucially depend on the good sense of employers, unions and those who invest and save money,” he said. Conceding that the recent inflation rate was caused by the expiry of the rent freeze, increase in electricity charges and petrol price rises, Mr Douglas expressed surprise that costs had been passed on as much as they had by the private sector. “I must say, however, that the buoyant conditions over the last year have allowed manufacturers to pass on costs more easily than we expected last year,”

he commented. “This makes me wonder whether Federated Farmers are correct when they say that Government is moving too slowly on lowering tariffs. The actions of manufacturers so far seem to show that they require less tariff protection. “The Government is consulting interested parties on means of phasing down high tariff rates on goods not covered by industry plans. “My personal belief is that in these circumstances there is a strong case for our taking a tougher line on tariff reduction.” Defending the Government’s policies aimed at correcting the economy, Mr Douglas said: “New Zealand has to take the battle against inflation on the nose.” There was an irony to Mr Douglas’s threat to consider lowering import tariffs more quickly. It came the same day that his Associate Minister, and Minister of Trade and Industry, Mr

Caygill, announced that the Government would not allow open competition from clothing imports. This decision was based on the clothing industry’s lack of an alternative market, and the Government has undertaken to fight for free access to Australian markets next month. But Mr Caygill also argued that wider competition could threaten jobs in the textile industry. Mr Douglas has also come in for criticism from an economist, Dr Gareth Morgan, of Infometrics, that the Government has failed to restrain money and credit growth sufficiently. Dr Morgan’s criticism has some currency in financial circles, and led the Government to review monetary conditions in the last week. It is believed that the Government was advised that monetary conditions were not easy, but that there was a danger people believed money was readily available to finance further

growth. Dr Morgan has suggested that the Government should cut the money supply back further to avoid inflation getting out of hand, and argued that “rhetoric will not constrain trading bank and other financial institutions lending.” Mr Douglas rejected this argument yesterday, saying the Government would achieve its aims, but not at the risk of “throwing the economy into a severe recession while doing so.” Mr Douglas has not completely rejected criticisms from economists such as Dr Morgan. He agreed that a firm monetary policy was an “essential prerequisite to lower, more stable interest rates and inflation rates over the medium term.” However, he contended that figures showing money held by financial institutions, showing remarkable growth for trading banks, could be misleading. Inquiries by “The Press” this week revealed that the

growth in trading bank deposits, which has caused concern, has been at the expense of merchant banks, finance companies and building societies. Trading banks, with bigger capital bases, have been able to survive longer on smaller operating and profit margins, than many smaller financial institutions, allowing them to offer higher deposit rates and attract more funds. Consequently, their lending has also increased. Institutions such as building societies and the Post Office Savings Bank had trimmed back their lending. Finance companies maintained the same level of lending, in spite of the marked drop in deposit growth. It is believed that the Government was advised this week that the money market might interpret the trading bank figures or broad monetary figures as signs of looser money conditions.

The Government therefore decided on two courses of action, which it has now implemented. These were to: • Give institutions, especially trading banks, a chance to invest excess money with the Government through the introduction of nine-month Treasury bills. These lock money away where the private sector cannot get at it, and $175 million was soaked up this week alone by this method. • Repeat its message to financial institutions that, as the money supply tightens, they cannot expect to see deposits continue to grow as they have, and should cut their lending accordingly. Mr Douglas’s speech yesterday was also a reminder to borrowers, like manufactuers, and to parties in the wage round, that the Government believes money will not be available to accommodate excessive price or wage rises.