Tuesday, April 29, 2014

Monetary Policy Upgrade

As the New Zealand election draws closer, we’ll see parties announcing more policies, and today the Labour Party announced a big policy: Labour is proposing a major change to dealing with inflation, which will help New Zealand.

As part of its monetary policy, Labour proposes to make Kiwisaver mandatory, and to then give the Reserve Bank of New Zealand (RBNZ) a new power in the fight against inflation. Instead of merely raising interest rates to dampen demand, the RBNZ will be able to adjust a variable savings rate (VSR), which would mean that it could compel people to contribute more to their Kiwisaver account.

Currently, the RBNZ can only raise interest rates to lower demand to ease inflation. That has two terrible effects: First, it increases mortgage payments of ordinary Kiwis. Second, it causes the Kiwi dollar to rise, which hurts exporters by making our products more expensive. Neither is good.

Under Labour’s plan, however, the RBNZ will be able to increase the VSR to dampen consumer spending, but it won’t raise the cost of mortgage payments or increase the Kiwi dollar. Moreover, the money that Kiwis will pay in the raised VSR will be theirs: It will go into their savings, NOT into the coffers of foreign-owned banks. That’s good in itself, but it will help increase the amount of capital available here in New Zealand for businesses, without them having to look overseas.

“Labour’s changes will work with our Economic Upgrade focussing on investment, innovation and industry policies,” David Parker, Labour’s Finance Spokesperson, said. “Alongside a capital gains tax, our KiwiBuild housing policy, universal KiwiSaver and reduced costs to businesses through NZ Power, Labour is offering an alternative that will help Kiwi families and ensure our economy can create better jobs and higher wages.”

This policy is very good, and is drawing praise from the business and finance sectors—in fact, the only critics I’ve heard have been aligned with the current National/Act government, as would be expected. Ironcially, considering how little attention the National Party pays to ordinary Kiwi families, they’ve actually said that this policy would hurt Labour supporters, but that’s nonsense: The National/Act government’s policies are keeping house prices high, hurting ordinary Kiwis, and they’re keeping the Kiwi dollar high, which hurts exports and kills jobs.

This policy is yet another reason why on September 20 we need to vote Labour to change the government.

More information on Labour’s Monetary Policy is available online.

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