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NZ economists float idea of temporary petrol tax cut

By NZPA

Monday 9th June 2008

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ANZ bank economists are floating the idea of a temporary cut in petrol taxes to mitigate the "extreme" nature of the current squeeze on disposable income.

"While we would not normally condone tinkering with 'sin' taxes to achieve other objectives, we also need to be realistic: exceptional times call for exceptional measures," they said today.

The economy was trying to navigate three shocks at once -- housing, credit and global costs.

The latter represented a huge income boost in the form of soft commodity prices but also a significant inflation threat, the ANZ economists said.

"Everyone expects monetary policy to be the economy's saviour and navigate us through unscathed. Yet we typically ask, and expect, too much of monetary policy."

It had one instrument -- the official cash rate -- and one target -- inflation. It was mathematically impossible to do anything more.

"Monetary policy needs mates, and the other avenue to look to is fiscal policy."

Policymakers were not impotent, the economists said.

"It may well be the case that the Government has to temporarily cut the tax on petrol as one avenue of mitigating the extreme nature of the squeeze on disposable income, and helping out the RBNZ (Reserve Bank) on the inflation front.

"Some people will have kittens over the prospect, and of course you need to be careful given the precedent this could set," they said.

"These are the most challenging times for the economy in 40 years. Petrol at $1.90 a litre, if we temporarily cut the tax component by 10c a litre (at a fiscal cost of $350m a year), is hardly going to reflate the economy and hence alter the medium term inflation outlook.

"Yet it would certainly help the RBNZ out by taking some pressure off near term inflation, considering the threat is now a headline inflation rate of 5%," the economists said.

"Policymakers can ill afford to stay on the sidelines and expect monetary policy to run solo."

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