Let's encourage production, not consumption, speculation

Jim Howard

In yesterday's Chronicle, I referred to alternative economic policies outlined in retired Professor Brian Gould's excellent book Rescuing the NZ Economy as proposals for improving the competitiveness of New Zealand's export economy, on which we all rely.

One of these is the Interest-Linked Savings Scheme, promoted by the late Phil Verry, a leading business figure in the last decade. He not only theorised - he bought the former Government-owned Waipa State timber mill out of receivership in the early 2000s and transformed it into the country's largest sawmilling firm under the name of Red Stag timber.

The Interest-Linked Savings Scheme (ILSS) was proposed to replace the current means of controlling the inflation rate and monetary supply, the Official Cash Rate (OCR), with a "more effective and better focused version of a mortgage interest rate levy".

When the Reserve Bank governor feels the need to control inflation, he increases the OCR, which imposes a surcharge on all interest rates paid on mortgages and other forms of borrowing.

This surcharge goes back through the system to the lenders who, because of our reliance on overseas borrowings, are largely overseas investors who bring their money in to take advantage of our high interest rates. Although our interest rates are low compared with a few years ago, they are still among the world's highest. These interest payments are lost to the economy and contribute to our current account deficit and reduce our national savings potential.

The ILSS proposal would have these same surcharges on interest rates paid into individual accounts in the name of the borrower, in a form of compulsory savings account.

The primary purpose of the surcharge - to remove money from circulation in times of inflationary pressure - would be met in the same way as now, but the money would stay in New Zealand.

The savings accounts of the borrowers could be dealt with according to government decision - paid out after a stipulated time or nominated age as a conventional superannuation policy; invested in a National Development Fund; or be available in times of specially declared adverse event, such as extreme weather events or personal crises.

The Labour Party's election economic policy set off on this track, but seemed to lose its way. Rather than applying the surcharge to payments on interest on borrowings, as proposed by Phil Verry and Brian Gould, they proposed to apply it to contributions to KiwiSaver superannuation inputs, and also to make KiwiSaver compulsory.

This would have meant that people who decided to opt out of KiwiSaver because they could not afford it would have to contribute, and their contributions would be increased by the amount of this inflation controlling levy. This would not be popular or justifiable.

They were targeting the wrong sector, but deserve brownie points for accepting that there is a problem and making a move to try to fix it.

When applied as originally proposed, those paying the levy are paying no more than they would be currently, and they have the bonus of knowing the levy will be returned to them. Too simple?

This ILSS policy has been another case of "shooting the messenger, rather than listening to the message".

It was in the mid-1990s that Phil Verry developed his proposals. They were so different to what we had been used to, and so inherently critical of the failure of successive governments to develop better macro-economic policies, that all parties - and the Reserve Bank - concentrated on shooting the messenger.

He was subjected to much vitriolic personal criticism, so thank goodness for Brian Gould for resurrecting the scheme.

This would be one of many policy changes needed to create a more export-friendly economy, and to move away from the high exchange rate-dominated economy that has done so much damage.

Just last week two more export firms announced lay-offs, blaming the "out of control exchange rate" for their need to either cease or modify their export production.

Wanganui's export businesses seem to be able to ride out the pretty intense pressures so far.

It has taken three decades to drift steadily downhill to the critical position our export industries, and consequently our country's viability, now find themselves in.

The Government has some decisions to make before deciding what - if anything - to do about it. Prime Minister John Key was on record last week as saying the exchange rate would be better around US 65 cents, his Minister of Finance continued to argue against a lower exchange rate because of the adverse effect on household spending and the cost of living.

But sooner or later we will have to bite the bullet and realise we have to turn the economy around from one which encourages consumption and speculation to one which encourages production, especially export production, which will generate the jobs which are so desperately needed.

Jim Howard is a retired Kakariki farmer and former Rangitikei district councillor.