The Government might want to think about cutting the GST rate if the economic cycle turns ugly.
That's the suggestion from the International Monetary Fund in its latest report on the New Zealand economy, released last weekend.
The context is one where the local and global economies are losing momentum, as the bank acknowledged on Wednesday: "Global trade and other political tensions remain elevated and continue to subdue the global growth outlook, dampening demand for New Zealand's goods and services," it said.
"Global long-term interest rates remain near historically low levels, consistent with low expected inflation and growth rates into the future. Consequently, New Zealand interest rates can be expected to be low for longer."
But what if the economy gets sideswiped by another international shock, the prospects of which are not nearly as distant as one might wish?
The IMF said the need for a fiscal — as opposed to monetary — policy response to an economic downturn in New Zealand was becoming more likely than it had been in the past.
"The global risk profile is increasingly tilted to the downside at a time when the RBNZ's policy rate is already at a low of 1 per cent. If a major risk realised, the effective lower bound on nominal interest rates might be more likely to become a constraint on monetary policy in current circumstances."
Effectively, the IMF is acknowledging that the days when governments could conveniently and entirely delegate mitigation of the economic cycle to the central bank are over.
Massive and sustained monetary easing has not been able to stop the global economy from slithering ever closer to a major downturn, while its side effects in terms of a build-up of debt, inflated asset prices, compressed risk margins and the absurdity of US$17 trillion ($27t) of government debt trading at negative nominal yields become ever more troubling.
When the global financial crisis hit, the Reserve Bank was able to cut the OCR by 5.75 percentage points to 2.5 per cent. On the fiscal side, the automatic stabilisers (falling tax revenue and increased welfare spending) saw government debt rise by around 20 per cent of GDP, from a very low base. The exchange rate adjusted as it should. Yet we still suffered the worst recession since the 1970s.
Now we are in the somewhat surreal situation where the OCR is 1 per cent and financial markets are preoccupied with guessing when the Reserve Bank will cut next and how far it will go.
But why? The bank is within cooee of the point where rate cuts do more harm than good.
The effect of further cuts will be to push house prices and household debt, which are already too high, even higher. And just because the cost of living isn't rising as fast as the bank would like?
As for its new mandate of maximum sustainable employment, the employment rate, admittedly a crude headcount measure, is already high by historical and international standards. Meanwhile, there is scant evidence in the business sentiment surveys that it is the cost of credit which is holding firms back from hiring and investing.
The authorities (the Treasury and Reserve Bank) have assured the IMF that "preparations for a policy response in the event of a severe economic downturn are under way".
The Reserve Bank, they say, is considering how to use its balance sheet most effectively, given the small amount of government debt outstanding.
"Considering" must involve a lot of scratching of heads, because what has become the conventional form of unconventional monetary policy elsewhere — quantitative easing, where the central bank buys up government bonds in order to drive down longer-term interest rates — is of little use when New Zealand government debt levels are low.
In any case, long-term rates are already remarkably low, with 10-year government stock trading at a little over 1 per cent.
So that leaves the onus on fiscal policy, if recession were to hit. It will have to do the heavy lifting next time.
"On the fiscal side, the main concern is readiness for a timely, effective response, given implementation lags, especially in capital spending," officials told the IMF.
When trying to figure out what form fiscal stimulus should take, two factors are the most germane: what will deliver most bang for the buck in raising gross domestic product (the multiplier, in the jargon) and what will work fastest.
Modelling the IMF staff have done, in a scenario where the OCR has done its dash, indicates that the highest multiplier is from government investment — in other words, spending on infrastructure.
It has the merit, if well chosen, of relieving bottlenecks, boosting productivity and the economy's potential growth rate.
But it is slow, and patchy.
Next best and faster-acting is government consumption spending. So, for example, paying teachers enough to live on in Auckland would be a good idea.
Next best in terms of the multiplier would be payments targeted to "liquidity-constrained households", which presumably means the poor. But the complexities of figuring out who should qualify could diminish the timeliness of such a scheme.
Which is why the IMF also likes the idea of a GST rate cut.
It would have to be a temporary measure, as the object of the exercise is to encourage people to bring forward spending.
It would raise disposable incomes and primarily support consumption for lower-income, credit-constrained households, it says.
It would be fast-acting. Intravenous, one might say.
GST provides just over a quarter of the Government's tax revenue and the Treasury estimates a 1 percentage point cut in the rate would cost it about $1.3 billion net in revenue.
On that basis, a cut in the GST rate from 15 per cent to, say, 10 per cent would leave around $6.5b in the hands of consumers, or roughly 2 per cent of GDP.
All else being equal, it would raise government debt by the same amount. But with net government debt sitting at 20 per cent of GDP, when the average for advanced economies is 77 per cent, that is unlikely to send us off to any ratings agency's sin bin.
Raising the GST rate is normally thought to be a regressive form of tax increase, that is, it is hardest on those with low incomes who need to spend every extra dollar that comes their way.
Presumably, then, cutting the GST rate would be progressive, as tax changes go, certainly compared with cutting personal or corporate income tax.
So it's not the worst idea in the world.