Govt policies ‘fail’ to deal with inflation

Press, 10 April 1987, Page 3

Govt policies ‘fail’ to deal with inflation

The Government’s monetary and fiscal policies have failed to deal with inflation, external debt, or overseas deficit problems, according to a prominent economist, Mr Len Bayliss. He said that this failure, partly a result of, the absence of accurate statistics, was worrying overseas creditors, and Could make taxation increases necessary.

Speaking at an economic conference in Dunedin yesterday, Mr Bayliss praised most of the Government’s individual micro-economic policies, such as corporatisation, tax reform, and deregulation.

He condemned, however, the Government’s macro-economic record. “Monetary and fiscal policies have failed to substantially reduce either inflation, the external deficit, or the growth of overseas debt,” he said.

“They have sharply reduced investment and international competitiveness in the tradeable sectors and have been largely responsible for the massive speculative boom in commercial property and share prices and for the growing disparities in income and wealth.”

Mr Bayliss repeated an earlier assertion that private overseas debt amounted to $l4 billion, giving a total overseas debt of $4l billion, or 84 per cent of G.D.P.

The official Government figure puts private

overseas debt at $6 billion, and total overseas debt at $33 billion, or 67 per cent of G.D.P. The 84 per cent was "extraordinarily high by accepted international standards,” Mr Bayliss said.

It should have been obvious to the Reserve Bank that large-scale private overseas borrowing was going on. Not only was the information freely available from banking institutions but it could be readily deduced from debt and balance-of-payments statistics.

If, as repeatedly said by the Government, it was not financing the balance-of-payments deficit, the deficit must have been financed by private sector borrowing, Mr Bayliss said.

One important reason for the Government’s failures was the absence of accurate statistics showing the public sector deficit, the public sector borrowing requirement, and their various components. “It is impossible to formulate effective economic management policies or indeed any effective management policies — private or Government — unless on accurate accounts.”

Last year the AuditorGeneral had also criticised the standards of Government accounting, Mr Bayliss said. The Government’s credibility overseas was being undermined by a suspicion that a degree of “creative accounting” was

occurring in statements about the Budget deficit. Mr Bayliss urged an improvement in macroeconomic policies, saying it was an urgent matter and would soon be forced on New Zealand because of its very serious overseas debt and bal-ance-of-payments problems.

“Overseas creditors are worried and with good reason,” he said. “In my opinion we have reached the end of the road begun in 1975 of consistently living well beyond our means and using massive overseas borrowing primarily to finance consumption and, broadly speaking, unprofitable investment.” Since 1975 overseas debt had risen from $1 billion to $4l billion, said Mr Bayliss. The core of the problem was the large public sector deficit which had been worsened by rising public debt interest costs. This growing interest burden had made it impossible to achieve substantial and rapid deficit reduction by expenditure cuts alone.

Mr Bayliss said that a big increase in taxation was unavoidable and might need to be in the order of $l5OO to $2OOO million. The chairman of the New Zealand Planning Council, Professor Gary Hawke, said Mr Bayliss was over-pessimistic. He agreed, however, that tax increases might be necessary.