We asked National's Nikki Kaye and Labour's Jacinda Ardern: Should the Government act to lower the NZ dollar?
Everyone has one of those stories; one that goes something like: "I was in London on holiday and it cost me $12 New Zealand dollars to buy an egg sandwich." Lately though, that story has changed. Not only is the Kiwi dollar incredibly high at present, we've traded the stories about egg sandwiches with something else: the impact the dollar is having on our economy.
Currently, our currency is one of the most traded in the world. That sounds like it comes with bragging rights, but the reality is that it's one of the things contributing to our high and pretty volatile dollar. For a country of our size, this hurts our manufacturers and exporters; those who could be generating not only more wealth for New Zealand, but more jobs.
Too often we overlook the role our exporters play in our economy. Our manufacturers employ more people than other industries like tourism, and contribute significantly to our exports. We need our exporters to not only succeed but to grow, and yet we continue to overlook the pressures they face. John Walley, the head of the Exporters and Manufacturers Association will tell you that, on average, it takes three to five years for a manufacturer to export into a new market. A lot can change in that time: a business case based on our dollar five years ago might look completely different now, let alone the fluctuations they manage on a short term basis.
It's no wonder our manufacturers are thinking twice before growing their businesses beyond our shores.
Yet that's exactly what we desperately need them to do.
No one is denying that the high currency is tough on our exporters; John Key has even acknowledged it. But rather than deal with the issue directly, his response has been to propose further labour market reforms. In my book, that is a complete cop out. Our country already boasts a comparatively flexible labour market- racing to the bottom via low wages and poor conditions is not the answer. We are so much better than that, and we deserve a vision that sees kiwis earning more, and in decent jobs.
When it comes to our dollar, the question instead should be, do we watch from the side-lines, crossing our fingers and hoping the game will turn back our way, or do we look at ways to change the game?
New Zealand needs step change. We clearly have structural problems in our economy and the government deficit is only part of it. For decades now we have run large current account deficits, which are projected to continue as we accumulate even more overseas debt. To overcome structural problems, you need structural changes. The government seems to be ruling this out on all counts, and yet pretends everything is fine. But things are not fine, in fact their own projections show us getting poorer by the year. That is not what I want for New Zealand. It's time we were bold, and that's exactly why Labour has developed a plan that's focused on building our economic resilience, and owning our future. Changes to our tax regime and keeping our assets are part of this plan, but so are changes to our monetary policy.
For too long now we have allowed a narrow prescription for monetary policy, relying almost solely on interest rates to control inflation. It doesn't have to be that way. Last year, we made the pretty bold move of saying that the consensus over monetary policy in New Zealand was over. We're no longer being well served by the single policy goal and narrow range of tools that governs the Reserve Banks' decision making. Of course, the Reserve Bank should remain independent, but they can do that while taking into account a broader set of objectives, such as a stable currency and full employment.
Our position on monetary policy may be bold, but it's not new. It's an approach that many of our counterparts already take: Singapore for instance successfully manages its external economy in a way that we just don't. It's time that we considered Kiwi interests, built up our resilience and supported the real economy. After all, there's much more at stake here than a pricey sandwich.
Yesterday I watched with sadness and disbelief the pictures of London burning. Many New Zealanders have a strong connection with that city.
My connection includes three and a half years living there and working in both the public and private sector including at Transport for London and the Halifax Bank of Scotland which has been casualty of the financial crisis. I remember landing at the airport tired and groggy after a long flight with a bursting backpack ready to do an OE and I still have friends living there that I have been trying to track down to see if they are alright.
For me the disbelief of what is happening in the UK stems from the fact that up until the last few years London has always been a symbol of strength as one of the centres of financial markets so to see it literally burning was sad and difficult to grasp.
The fact is the world has changed. What our generation is seeing is decades of countries and people spending more than they earn coming back to bite us combined with the rise of a number of smart better educated countries in the East.
That is why I believe that anyone seriously thinking that we as a small country in the middle of the South Pacific can somehow beat what is happening around the world by fiddling with our currency or monetary policy mechanisms is at best very naïve. It shows little understanding of the global financial crisis and the change that is happening in the world.
There have been a number of reviews of monetary policy in New Zealand in the past decade. Some people propose that the Reserve Bank should have multiple targets rather than its primary one of keeping inflation down. However, in 2000, a review was undertaken by Professor Lars Svensson who found that our monetary policy is entirely consistent with best international practice.
In 2008, under the last Government, a review through the Finance and Expenditure Committee found that New Zealand's approach to monetary policy is standard among small, open, developed economies and regarded as world best practice.
In fact, no changes have been made as a result of four or five reviews over the last 10 years, and that is because there have consistently been findings that no obvious changes are needed.
I recently heard former British Labour Prime Minister Tony Blair speak in Auckland. He was clear that his belief was that the countries that would succeed in the 21st century are the ones with open economies.
I agree, but also believe the strong countries in the future will be those that are resilient with well-educated people, low public and private debt, smart and cutting edge infrastructure including transport and broadband and open and diversified economies both in terms of what we export but also the nations that we trade with.
Since National came to office, it has taken responsible decisions to restrict the build-up in government debt and get government spending and finances under control. In particular, we've turned back 2008 forecasts of a decade of deficits and ever growing debt. Today we can report, we're getting on top of our borrowing, and are forecast to be back in surplus by 2014-15 at the latest.
The Government has introduced the biggest reform of the tax system for 25 years, which rewards work and savings, discourages borrowing and consumption, and significantly tightens tax rules on property speculation. We've overhauled capital markets regulations and established the Financial Markets Authority, giving investors' confidence in market rules and enforcement. We have been aggressive in diversifying our trading partners by pursuing free trade agreements, with a focus on Asia and the Pacific, where more than 70 per cent of our trade is focused.
We now have free trade agreements in place with Australia, China, Hong Kong, Thailand, Singapore, Malaysia, and ASEAN. We are negotiating FTAs with Korea, India, and Russia. And we are negotiating the Trans Pacific Partnership involving Brunei, Chile, Peru, the United States, Vietnam, Australia, Singapore and Malaysia. The good ship New Zealand has started to tack towards the east with China replacing the United States as our second largest trading partner.
Things are tough, but New Zealand is on track to building a more resilient economy and I don't believe that most New Zealanders will accept that fiddling with monetary policy will magically solve our economic issues. We have to take steps across the whole economy, live within our means, and increase savings.
Nikki Kaye is on Facebook and Twitter @nikkikaye
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