Is The Government’s Policy Prescription Enough?

Fran O’Sullivan asks some important questions of our new Prime Minister and Deputy Prime Minister in today’s NZ Herald:

During the election campaign Key clung to the notion that National’s “well-structured economic plan” would ensure the New Zealand economy is hermetically sealed from the global shocks.

But he should now be assessing whether National’s impending tax cuts package, infrastructure spending proposals and mechanisms to help newly redundant workers will be enough to stave off the worst effects of the crisis here and pave the way for New Zealand to move out of recession by 2010.

In the post below I report on an update of these policies provided yesterday to the NZCCI Conference by Bill English.

The answer to Fran’s question is obviously “no”.  But that said the policies are very much heading in the right direction.

The Government is very new and is still getting to grips with the enormity of the challenges it is being confronted with.  This is something of a shock to some Ministers.  Clearly more policy will need to be introduced, but I am comfortable that we are not seeing policy responses being rushed.  We already have a good example of what can go wrong if policy is rushed in the form of the Government guarantee of deposits in banks and some other financial institutions.

I guess that I am in something of a privileged position.  I have met John Key and Bill English (twice) since the election.  I have also met with of talked to a number of the other Ministers in the new Government.  These have been detailed discussions.  I am absolutely convinced that the new Government wants to meet the immediate challenges of the financial crisis and to get the economy growing again.  Much in the same way as Fran O’Sullivan seems to be challenging.

As Bill English has outlined to the media, October’s tax cuts, Government expenditure increases and the April tax cuts will put another $7 billion into the economy.  In an economy of this size this is a significant stimulus.  On top of this we have the stimulus that will come from the last and next cuts in the OCR by the Reserve Bank.  Our interest rates are still quite high compared to other economies of our type.  This means we can use this mechanism to stimulate the economy in a way that the US, Japanese and many European economies can’t.  This is a huge advantage.

What we have seen announced will not be enough, but I am confident that over the next few weeks more policy will emerge that will improve our policy response to the crisis further.  We will need these improvements because I think that things are going to be much worse post-Christmas.  I have real concerns about retail and I expect a substantial rise in unemployment.  But with increasingly better policy, with low interest rates, and with a healthy banking sector that is still willing to support good companies and ideas, I think we can get through this challenge and get the economy growing again.  To achieve this we will need a vastly improved export performance and stronger productivity growth.  These topics will be key themes for Dear John, and I hope the Government, in the weeks ahead.

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