The neoliberal myth is that government economic policy doesn’t really matter, it can’t affect the economy – apart from being an anchor on growth. The truth is, government is the biggest actor in our economy. What it does matters. Bernard Hickey has listed 10 ways that the government could act to get the exchange rate down.
1. The government could stop sucking in foreign capital to fund its budget deficits. That means cutting spending on the likes of Working For Families, Interest Free Student Loans and 20 hours of free early childcare. It means raising taxes, either income taxes or by imposing a land tax.
- Governments should run structural surpluses, only going to deficit in recession. At the moment, we have a structural deficit, largely caused by the fact that National has cut so much tax revenue. Redressing that is the place to start. There’s no reason why running surpluses has to come from slapping the poor and middle class. How many billions has the government given away in tax cuts for the wealthy? How much would a capital gains tax raise?
2. The government could run budget surpluses and use that to build some sort of stabilisation fund to reduce the pressure of capital inflows on the currency. That is obviously after it had repaid the government’s foreign debts.
- Labour had us at the cusp of that in 2008 with no net government debt. Their tax package would get us back there, after National’s record borrowing, within a decade.
3. Or the government could use those surpluses to buy back assets sold to foreign interests, which mean those dividend payments stop acting as a drain on the national accounts.
- Good Leftwing policy, that.
4. The government could impose a tax on foreign borrowing by New Zealand companies, not least of which by those state owned enterprises such as Kiwibank, Transpower and the power companies. This, again, sucks in foreign capital and pushes up the currency.
- Brazil has introduced such capital controls. The Greens are planning such a policy, if rumour is to be believed, and Phil Goff hasn’t ruled it out.
5. The government could ban the sales of large assets, in particular land. The Chinese do it.
- Just good bloody sense, and Labour/Green policy
6. The government could encourage the Reserve Bank to use its macro-prudential tool kit to take the pressure off the currency.
- Again, good Leftwing policy, which both Labour and the Greens have promoted
7. These include the Core Funding Ratio, which discourages the use of ‘hot’ foreign money to fund lending in New Zealand. The RBNZ could increase it beyond the current target of 75 per cent by July 2012. It increases term deposit rates here and encourages local saving.
- Definitely something to look at
8. The Reserve Bank could introduce a maximum loan to value ratio for property and land lending. The banks have again begun lending up to 95 per cent in recent months in an attempt to restart lending growth. They are also offering interest only and 30 year loans.
9. The Reserve Bank could force the banks to match their local New Zealand dollar lending with New Zealand dollar funding. This would have to be done over a long period of time, given the scale of the foreign debts held on our behalf by the banks.
- That’s a big one, but is it so crazy to say that we should be able to pay our own way in the world – funding our development with our own savings? Relying on capital from overseas is for colonies, developing countries, and crumbling empires
10. The government could encourage local procurement by its own departments and SOEs to reduce the scale of the current account deficit which is driving our currency higher.
- Hey, that’s Labour/Green policy already too!
Funny, none of those ideas are National policy but half of them are existing Labour/Green policy. So, if you want a lower exchange rate, you know who to vote for.