IER predicts rates drop

Press, 29 July 1989, Page 25

IER predicts rates drop

- , Wellington The Institute of Economic Research predicts a further fall in interest rates over the next 18 months following the release of Thursday’s Budget. The strategy of no new domestic government borrowing combined with debt repayment relied on a reduction in al! interest rates, the institute said yesterday. Economists expected a further 0.5 to 1 per cent drop in interest rates outlined in the institute’s June quarterly predictions. The institute forecast five year Government stock, at 12.9 per cent in July this year, to fall to 10 or 10.5 per cent by March, 1991. First mortgages, now 15.2 per cent would drop to 12 or 12.5 per cent. The base lending rate of 15.8 per cent would be 12 to 12.5 per cent by then. Interest rate falls were expected to be relatively steady, the institute said. The Government’s intention to issue new five year Government stock in place of high coupon stock would temper any immediate downward pressure on Government stock rates that would otherwise arise from the lack of new issues by way of a tender programme. The institute said there might be upward pressure on interest rates in the short term following a revision in the frequency of PAYE payments to twice a month. This would increase the demand for private sector working capital. The institute said the Budget reaffirmed current fiscal and monetary policy, but with significant changes in the debt repayment programme. “This is now to be reoriented toward domestic rather than overseas debt,” the institute said. The improvement over the last three years in the country’s overseas debt burden was a justification for the refocus. However, the force behind the change > was the deterioration in domestic economic conditions. Of concern was the weakness of recovery since the turning point in mid 1988-99. This was underlined by the “persistent refusal of intended or actual fixed

investment to respond and the corresponding poor outlook for employment growth,” the institute said. Inflationary pressures were likely to be mollified, with the reduction in ACC levies, fuel oil tax and the land tax rate. However, this would be offset by the wider application of land tax and higher alcohol and tobacco taxes. The significance of the Budget was its emphasis on a systematic approach to social welfare expenditure. The philosophy underlying changes was that once the need for income support was established, then the level of .support should be the same for all recipients, the institute said. Current social welfare benefits would be replaced in April, 1990, with a single "generic” benefit. A universal Guaranteed Retirement Income instead of national superannuation would come into effect from April next year. The burden of retirement income on taxes would be reduced by indexing rates to the lower of wage increases or the consumer price index. The payment would eventually equal the “generic” welfare benefit. Accident compensation extended to cover adults under 60 incapacitated by illness as well as accident would be cost neutral. This would be achieved by reducing payments in the early period of incapacity. Whether this objective could be achieved depended on as yet unspecified length of the initial “stand-down” and the level and period for the flat rate payment before income support being paid. “It remains to be seen whether the" resulting parameters will be acceptable,” the institute said. Economists forecast the deficit would fall as revenues increased in real terms at a faster rate than expenditure. The institute anticipated a fiscal deficit of about 0.8 per cent of GDP. This was lower than conservative Government forecasts of 1.1 per cent. The difference in forecasts was insignificant. The institute forecast a balanced budget for 1990-91.'