Bollard Says New Zealand Spending Cuts Could Curb Rate Rises
New Zealand interest rates needn’t rise as much if the government cuts spending and reforms the tax system to curb property investment, Reserve Bank Governor Alan Bollard said.
“Achieving both low inflation and balanced growth is considerably easier in an environment of fiscal discipline and where the tax system is neutral with respect to investment decisions,” Bollard said in a speech in Christchurch today. Notes of a background paper on which his speech was based were e-mailed to Bloomberg News.
Bollard, who has kept the official cash rate unchanged at a record-low 2.5 percent since April, said yesterday he didn’t expect to start raising borrowing costs until mid-2010 as the economy emerges from a recession. Government spending programs put in place last year to buoy confidence and create jobs will help the economy expand 3.1 percent this year after shrinking 1.4 percent in 2009, he forecast last month.
“A failure to gradually remove the recent fiscal stimulus would put added pressure on monetary policy over the coming period,” Bollard said today. He made no other comment on the outlook for interest rates.
Prime Minister John Key’s government last year brought forward spending on roads and schools to generate jobs, and provided companies with funds so they could keep factories open on reduced hours rather than fire workers.
The government is also considering recommendations from a review of the taxation policy that includes introducing a levy on rental properties.
“We are hopeful that the report of the Tax Working Group will lead to a more efficient and even-handed tax system,” said Bollard. “Our concerns are to minimize tax-fueled property investment and consumption that might detract from more balanced savings and growth.”
Bollard has previously called for taxes to curb property investment, which he says can create a housing bubble.