PM on New Zealand Reserve Bank Policy Shift–transcript

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Will Bud­get tax cuts fuel inflation?  (click here for the MP3 file)
PM — Wednes­day, 9 May , 2007  18:14:52
Reporter: Stephen Long
MARK COLVIN: Now, will the tax cuts in the Bud­get cause infla­tion?

Some lead­ing econ­o­mists argue that the Reserve Bank could be forced to lift inter­est rates down the track because Gov­ern­ment spend­ing and tax cuts will increase con­sump­tion and prices.

But oth­ers dis­agree. They argue that debt lev­els are so high that many peo­ple will be hand­ing their tax cuts straight to the bank.

Debt lev­els have also soared across the Tas­man, and the Reserve Bank of New Zealand today warned that unsus­tain­able home lend­ing was plac­ing the entire econ­o­my at risk.

It fore­shad­owed tighter con­trols on banks to curb the growth in risky loans.

Eco­nom­ics Cor­re­spon­dent Stephen Long reports

STEPHEN LONG: Who does­n’t want a tax cut, espe­cial­ly if you’re strug­gling on low to mid­dle wages?

But is it a case of what the Trea­sur­er giveth, the Reserve Bank will taketh away?

CHRIS RICHARDSON: In the com­ing finan­cial year the Gov­ern­ment will be spend­ing $12 bil­lion extra — $5 bil­lion… more than $5 bil­lion of that will be tax cuts, and that will be par­tic­u­lar­ly aimed at low­er paid peo­ple. They will spend. They will take that mon­ey and they will spend.

STEPHEN LONG: That’s the view of Chris Richard­son, a Direc­tor of Access Eco­nom­ics.

CHRIS RICHARDSON: So there’s well over one per­cent­age point of nation­al income being put, one way or anoth­er into pun­ters’ pock­ets.

The extent to which they spend means that we will pres­sure an econ­o­my com­plete­ly at full stretch, with unem­ploy­ment at 32-year lows. That would have to make the Reserve Bank sweat, and it might make them suf­fi­cient­ly wor­ried to be rais­ing rates ahead of the elec­tion.

STEPHEN LONG: But will they spend the mon­ey?

Con­ven­tion­al eco­nom­ic wis­dom says the poor tend to spend their tax cuts, while the rich save them.

But Dr Steve Keen from the Uni­ver­si­ty of West­ern Syd­ney says it’s bunkum.

STEVE KEEN: It’s the usu­al sto­ry of econ­o­mists ignor­ing the role of debt.

I mean, some years ago, when the mon­ey was hand­ed out in tax cuts, it went into the deposits, it went into the mas­sive­ly geared mort­gages, and it drove the whole hous­ing bub­ble.

Now peo­ple have got them­selves so deeply in the doo-doo with hav­ing repay­ments they can’t quite man­age that that extra $15 to $21 a week is going to go to the bank man­ag­er, it’s not going to go to the super­mar­kets.

So I can’t see it dri­ving infla­tion. I can see it play­ing a use­ful role in drag­ging some peo­ple away from the precipice of unpayable debt.

STEPHEN LONG: Thou­sands have fall­en over that precipice, with unprece­dent­ed rates of home repos­ses­sion in the poor­er sub­urbs of some of the major cities.

And its the bat­tler house­holds — in work but on below aver­age earn­ings — who are pay­ing the biggest share of their income to ser­vice debt.

The tax cuts are designed to ben­e­fit them the most.

Work­ers earn­ing $30,000 to $40,000 will get a tax cut of more than $21 a week.

Dr Steve Keen says its no coin­ci­dence.

STEVE KEEN: Clear­ly this is direct­ed to putting mon­ey in their pock­ets now and hope­ful­ly tak­ing the pres­sure away, so they won’t think they have to vote for Kevin Rudd to relieve the debt pres­sure.

STEPHEN LONG: Across the Tas­man house­hold debt is also at record lev­els, and the Reserve Bank of New Zealand is wor­ried.

Today it issued a report warn­ing that home lend­ing prac­tices are becom­ing risky and unsus­tain­able.

Grant Spencer is the New Zealand cen­tral bank’s Deputy Gov­er­nor.

GRANT SPENCER: We have seen a ten­den­cy towards more risky lend­ing. So the risk pro­file of mort­gage lend­ing has increased. And also we’ve seen poten­tial­ly unsus­tain­able reduc­tions in mar­gins and pric­ing.

And we just don’t think that’s a par­tic­u­lar­ly sen­si­ble thing to see when we’re some­where near the top of that cred­it cycle.

STEPHEN LONG: Banks are issu­ing more loans to bor­row­ers who have lit­tle or no deposit.

And the Reserve Bank of New Zealand says cred­it is so cheap, some banks are lend­ing on mar­gins that can no longer even cov­er their oper­at­ing and cap­i­tal costs.

It also warned that the cur­rent account deficit is blow­ing out because of the huge vol­ume of bor­row­ing off­shore to finance home lend­ing — a sit­u­a­tion that would even­tu­al­ly hit break­ing point.

GRANT SPENCER: It’s a bit like a rub­ber band. The fur­ther a rub­ber band gets stretched, the more like­ly it is that you’re going to have a sharp cor­rec­tion at some point down the track.

STEPHEN LONG: New Zealand’s Reserve Bank has fore­shad­owed cap­i­tal con­trols on lenders, designed to rein in riski­er loans.

Steve Keen says this is a major step with glob­al impli­ca­tions.

STEVE KEEN: It’s huge. It’s the biggest move in terms of Reserve Bank ide­ol­o­gy in 20 or 30 years.

For that length of time they’ve been basi­cal­ly say­ing, ‘Let’s leave it all to the mar­ket,’ and now they’re final­ly say­ing, ‘We’ve left it to the mar­ket, and what actu­al­ly has hap­pened is an unsus­tain­able bor­row­ing binge which the only way to… seems to be stop­pable is by bring­ing back reg­u­la­tion.’

And that’s an enor­mous shift in Reserve Bank the­o­ry and prac­tise over the last 30 years.

STEPHEN LONG: But don’t expect the Reserve Bank of Aus­tralia to fol­low New Zealand’s lead.

At the height of our hous­ing boom, the option of impos­ing tougher cred­it or cap­i­tal con­trols on lenders was debat­ed and dis­missed.

MARK COLVIN: Stephen Long.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.