Following the Reserve Bank’s Monetary Policy Statement earlier this month, some economists are questioning the need for the Bank to maintain a strict inflation target. Some have gone so far as to say that inflation targeting has failed to improve New Zealand’s economic wellbeing and should be done away with altogether. Such attitudes are scary – inflation targeting by a credible central bank is a vital part of sound economic management.
The government is looking for a way to cuttaxes within the confines of its "four conditions". Given the difficultyassociated with achieving these conditions through personal income taxes, it ispossible that the government may look at other forms of tax cuts, such asreducing the GST rate. However, any belief that a reduction to the rate ofgoods and services tax will be more likely to satisfy these conditions ismisguided.
Many financial analysts view the currentslide in the ‘Baltic Dry Index’ as indicative of an upcoming collapse incommodity prices, however we do not believe the story is quite that clear cut.
The recent hot summer has not only been bad for my skin, but for famers as well. A drought has reduced production of agricultural goods, undermining a major source of New Zealand export income. Furthermore, growth in both the number of people and cows has begun to stretch the water infrastructure in some regions, suggesting that a longer-term problem of water shortages beckons. When an economist hears the word shortage there is one thing we think – put the price up. So it is about time we set a price for water, by establishing a market.
Researchers at Massey University suggestedthat the government should subsidise fruit and vegetables, in order to increasehousehold’s consumption of these ‘healthy’ foods. However, if we are willingto accept this I would like to take it one step further and suggest that wealso place a tax on unhealthy foods (foods with a sufficiently low SSCg3d scorefor example), a concept economists tactfully term a ‘fat tax’.
For the last few years, the government has put off cutting taxes because of their inflationary impact. Now, with the government willing to cut taxes, the Reserve Bank is unhappy because of their inflationary impact. This begs the question, how inflationary are tax cuts?
The Reserve Bank of New Zealand wishes to reduce immigration to ease inflationary pressures. But blaming immigrants for inflation when we have a tight labour market makes as much sense as thanking the horde of New Zealanders moving to Australia for reducing inflationary pressure. Although migrants increase demand for goods, they also bring with them a number of types of capital (physical, intellectual, and financial) that can increase the economy’s capacity and thereby ease inflationary pressure.
The government is set to introduce amandatory sales target for bio-fuels with the goal of improving the security ofNew Zealand’s fuel supply. However, the economic benefits from this policy could be outweighed by the additionalcosts imposed upon firms and consumers, as well as stifling longer-term effortsto produce efficient bio-fuel domestically.