Look outward, not at shared currency - study
What do you think about joining the NZ and Aussie currencies?
Trans-Tasman monetary union has been ruled out because the costs far outweigh the benefits, according to a discussion draft released today by the Australian and New Zealand Productivity Commissions.
The draft report identified 20 policy initiatives to strengthen trans-Tasman economic ties. Most involve regulatory barriers to shipping and air services and some impediments to further integration in goods, capital and labour markets.
However, there were some options which the joint commissions believed should not proceed. Excluding political union as a realistic option also limited the scope of some economic integration initiatives, the report said.
The case for monetary union had still not been established, the commissions found.
“Tying New Zealand's fortunes to Australia's currency would result in monetary policy being driven by Australian conditions, with decisions made by the Reserve Bank of Australia,” the study said.
“Clearly this may not always be appropriate for New Zealand, particularly when economic conditions are different and when experiencing divergent business cycles.”
Available studies of a monetary union suggest that the potential costs would outweigh the benefits.
“Overall, the commissions do not consider that the prerequisite conditions for a trans-Tasman monetary union exist, a view that is shared by most participants in the study.”
However, Closer Economic Relations (CER) initiatives were found to have benefited both countries over the 30 years since it took effect in January 1983.
Tariffs and quantitative restrictions had been eliminated on virtually all goods traded, people moved freely between the countries and the CER had expanded into new areas such as services trade, it said.
But “barriers to further integration remain and new issues will emerge,” the study said.
“Addressing them is becoming more challenging, however, as the focus shifts to more complex areas including many involving regulation of services.”
CER initiatives should continue to be outward-looking, the study said, taking into account linkages with other trade agreements.
The trans-Tasman agenda now needed to fit with the broader challenges and opportunities from investment links with Asia.
The major initiatives likely to deliver benefits to both countries relate to business law, occupational licensing systems, abolishing “rules of origin” for all items with tariffs at 5 per cent or less which would reduce compliance and administration costs for most trans-Tasman trade, and reducing red tape and costs in air services and shipping, as well as capital and people flows.
The area of greatest concern for business participants in the study was mutual recognition of imputation credits on share dividends.
Dividend imputation removes double taxation of distributed company income, but only applies domestically.
Other “unfinished business” was the CER “investment protocol” which has been signed but not enacted and would reduce administration costs for government and compliance costs for firms and improve capital allocation, the study said.
Public feedback is being sought on the discussion draft. The commissions' final report should be completed by December.
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