The high NZ dollar and the role of government spending
Recent ExportNZ Bulletins have looked at the high NZ dollar and considered possible remedies.
The crux of the matter is the relative strength of the $NZ against the weakness of the US dollar.
With so much of the world’s trade conducted in US dollars, it has a big impact on New Zealand exports to many countries.
Of course there is not much we can do about the weakness of other countries’ currencies, but could we intervene in our own currency to slow its rise or its volatility?
Suggestions for stability
Some of the suggestions put forward have included currency controls, Tobin taxes, core-funding ratios and other methods.
While some of these may have potential in temporarily stabilising currency movements, they all have downsides.
Unfortunately, none of them can bring currency stability without at the same time increasing interest rates, reducing necessary liquidity or doing damage somewhere else in the economy.
These kinds of currency controls are also not a good fit with floating currencies in a globalised world.
Like New Zealand, most countries have now floated and would find it difficult to introduce ‘command and control’ policies from a past era.
Does that mean we can do nothing about this situation which is depleting returns to our exporters?
In fact, there are some solutions – but they are not an instant fix.
First, we could seek to make our economy as competitive as it can, thereby allowing New Zealand exporters to be as competitive as they can.
This is important because a high currency brought about by a competitive, high-value, high-functioning economy is a very different thing from a currency that is only high in comparison with a weak $US.
So making our economy as competitive as possible is a major issue.
Competitiveness comes down to innovation and productivity.
Innovative products and services means we can become price makers, not price takers.
And productivity greater than other countries allows us to earn comparatively more.
How can our economy be made more competitive?
First, the Government could reduce the compliance burden on business – removing or changing regulations that unnecessarily impact on productive companies.
It could do more to ensure that more young people get an education that equips them with the skills needed by business.
And it could cut company tax, reducing some of the cost burden on exporters.
Another solution lies in the fact that high interest rates cause high exchange rates.
Addressing the inflationary pressures that prompt higher interest rates
Addressing the inflationary pressures that prompt higher interest rates is therefore a good way to get a lower $NZ.
A key driver of inflation is excessive spending by central and local government.
Annual expenditure by central government is well over the accepted prudent level of 30 percent of GDP, and local government expenditure has increased higher than the rate of inflation for several years.
Cutting back that level of expenditure would do a lot to reduce inflationary pressures.
It would not necessarily mean cuts in essential services - there are many examples of ill-targeted spending that could be reduced.
Interest free student loans, for example, provide incentives for students to spend beyond their means without incentives to retire the debt quickly when they graduate.
Spending on Working for Families is also in many instances ill-targeted, in effect making three quarters of working families beneficiaries.
Combing through the books of central and local government for areas where unnecessary spending can be reduced would therefore be a key way of helping to reduce the high New Zealand dollar.
Restraining government spending would do a world of good for exporters.
John Pask
John Pask is BusinessNZ economist
jpask@businessnz.org.nz
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