Giving the Reserve Bank the power to vary petrol prices could take the heat out of the economy without raising interest rates, says former Reserve Bank Governor Don Brash.
Dr Brash, writing for tomorrow's Herald, says varying the price of petrol would do away with the negative effects
that higher interest rates have on exporters.
A significant increase in the excise tax on petrol would compel people to reduce spending on other goods and services, while any significant decreases would enable people to increase spending.
Dr Brash's idea comes during an inquiry by Parliament's finance and expenditure committee into the causes of inflationary pressures and the effectiveness of current monetary policy in controlling inflation.
He said about 10 years ago, when he was Reserve Bank Governor, a visiting American academic, Professor Larry Ball, suggested giving the governor the authority to vary the rate of GST.
He did not favour the idea because GST was levied on virtually everything at the same rate, and the rate changed infrequently.
Now, he said, the time had come to give "very serious consideration" to a variation of Professor Ball's idea by varying the excise tax on petrol.
"The systems are in place which would enable the excise tax on petrol to be varied without too much drama [and] the public are accustomed to the price of petrol fluctuating from week to week."
Dr Brash said giving the Reserve Bank Governor the authority to vary the excise tax would require safeguards, such as ensuring the additional revenue from higher prices was broadly offset by reduced revenue over a period of, say, five years.
The revenue would also have to be held by the Reserve Bank, separate from the Government.
A financial commentator said Dr Brash's suggestion would run into constitutional problems because it would hand over fiscal responsibility for setting taxes to someone other than the Government.
