Bollard warns political parties against new spending or tax cuts

By NZPA

Thursday 7th December 2006

Reserve Bank Governor Alan Bollard today warned political parties new spending initiatives or tax cuts would be met by interest rate hikes if enacted in the current part of the business cycle.

In his quarterly Monetary Policy Statement briefing today he warned inflationary pressures allowed less than usual headroom to accommodate additional fiscal expansion.

The Government is under pressure to redistribute a burgeoning budget surplus which is likely to be even bigger than forecast in the May budget as the economy has been stronger than forecast.

Dr Bollard said the bank had not factored policy changes into its projections but Finance Minister Michael Cullen has signalled a cut in 2008 to the business tax rate and related income tax rates.

A main plank of the Opposition National Party is tax cuts.
Dr Bollard noted "fiscal policy poses a particular risk for the medium-term outlook".

If the Government stimulated the economy further with new spending or tax cuts, "any initiatives would need to be factored into the outlook and could imply additional monetary policy response".

When asked to explain that, he said: "We are simply pointing out there could be more pressure from fiscal expansion and that would have to be looked at in the context of what it might do for monetary policy."

It was one thing to introduce fiscal expansion when the economy was slowing but it now seemed the economy was on the rebound, he said.

"Actually this economy looks like it has gone through a soft landing and is picking up and becoming stronger again.

"We'd expect anybody in the fiscal side of Government to take that into account.

"We observe high surpluses and know there will be pressure over the next couple of years."

Because annual inflation was running at 4% and was forecast to remain close to the top of the bank's 1-3% inflation target for two more years, "there is less chance of fiscal expansion happening at a time when the economy could easily absorb it and that's what we're noting at this time".

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