Russel Norman: NZ has to live within its means again

Russel Norman. Photo / File

Opinion

Last month, I outlined a plan to address our high exchange rate - a plan that would protect our productive industry here at home while making our exports more competitive abroad.

As a nation we have to live within our means. For the last 30-odd years, we've almost forgotten what this looks like. Successive governments have chosen to turn their backs on this difficult truth, preferring to run the economy through increased borrowing from offshore or by selling our assets offshore.

At some point, this is all going to have to come to an end. At some point, foreign lenders will doubt our ability to repay our debts, our credit rating will be rapidly downgraded, and our small economy will receive a shock so severe that it will set off new rounds of job losses, government cuts and another generation of New Zealanders lost to Australia.

Successive governments have taken the gamble that this shock won't happen under their watch. They've tinkered with traditional monetary policy settings while overseeing the gradual accumulation of $311 billion gross debt ($149 billion of net debt) and great swathes of our economy sold offshore. Think banks, telecommunications, farms, and now power companies.

The Green Party has proposed a plan to carefully manage our transition to a country that lives within our means once again, rather than a repeat of the pain inflicted on us by the cruel and unfair reforms of the 1980s and 1990s.

To rebalance the economy onto a more sustainable footing, the Green Party is proposing to modernise the mandate of the Reserve Bank, broadening its singular focus on inflation to include a commitment to full employment and maintaining a fair exchange rate that helps our exporters and manufacturers thrive again.

The bank will maintain its independence and be empowered with more tools to manage damaging asset bubbles - something they've historically been unwilling to do. The Reserve Bank will work in New Zealand's long-term interests, recognising that 200,000 people out of work is a problem for New Zealand just as much as inflation.

A broader mandate for the bank will likely see cuts to the Official Cash Rate lowering interest rates and taking the pressure off the exchange rate to stimulate productive investment.

Without changing the tax system that currently incentivises property speculation, lower interest rates are likely to fuel yet another housing price bubble in Auckland and elsewhere.

A second crucial component of our proposal to rebalance the economy is to introduce a comprehensive tax on capital gains with an exemption for the family home. While a capital gains tax is no silver bullet, it's a smart tax that shifts the incentives further towards productive investment - that means more jobs and exports.

The Green Party's final proposal is to imitate what successful economies like Switzerland are doing by using quantitative easing (QE) to manage the present over-valuation of the New Zealand dollar.

Creating new money is a big call but can we afford to sit by while the rest of the world is involved in the competitive devaluation of their currency? The high dollar is causing long-term structural damage to our economy and it's time to follow the advice of bodies like the International Monetary Fund and employ non-traditional monetary policy to best protect our productive sectors.

In designing our proposal, we were sensitive to any possible inflationary potential. We took into account that New Zealand currently has very low inflation. The international experience of QE is that it has not produced runaway inflation, and we targeted Reserve Bank credit at sectors that would not add directly to aggregate demand in New Zealand.

As most commentators are predicting, our dollar will come down eventually. We can't live beyond our means indefinitely. Do we use all the tools available to us to manage this transition gently? Or do we keep believing in the good fairy of free market economics whose invisible hand got us into this deep mess in the first place?

* Russel Norman is co-leader of the Greens