Call for drastic business remedies

SUNDAY STAR-TIMES

RADICAL SOLUTIONS: Selwyn Pellett, non-executive director of Endace, has suggested introducing a capital gains tax, tax breaks for research and development, and taxing foreign bank transactions.

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On a sunny Sunday afternoon in Christchurch about 50 people gather to listen to four men preach what big business and government circles consider economic heresy.

The speakers are Business and Economic Research chief economist Ganesh Nana, hi-tech businessman Selwyn Pellett from Endace, Manufacturers and Exporters Association chief executive John Walley and business commentator Rod Oram.

They are all singing a similar song: The New Zealand economy is broken and needs a drastic policy shift to avert complete disaster brought on by ballooning foreign debt and a crippled export sector.

The speakers say that sticking to the prevailing economic wisdom is flawed because in the not too distant future our foreign debt, sitting at $173 billion net as of September 2009, will sink us.

Dr Nana told the audience the global financial crisis had been used as a political smokescreen, an excuse for a recession produced by New Zealand's monetary policy.

He pointed to the Reserve Bank statement from June 2008, before the global financial crisis hit, which said a "downturn is in part required to keep medium-term inflation under control".

"We have put up with four years of going backwards to meet that [inflation] target. The New Zealand recession is engineered."

The focus on controlling inflation through interest rates had left exporters ravaged by a volatile exchange rate and led to higher interest rates, flooding New Zealand with cheap overseas money, he said.

A tax system tilted toward passive investment attracted the cheap money into property, pushing New Zealand further into debt while banks closed credit lines on productive businesses.

"We are heading for a low-wage cul-de-sac."

Dr Nana's position runs against the prevailing economic mantra, often espoused by Business New Zealand, that inflation targeting is "best practice" and fiddling with monetary policy risks New Zealand's financial stability.

Although Finance Minister Bill English has said economic policy should be tilted away from property investment toward exporters, he does not favour drastic changes to monetary policy.

The New Zealand Fabian Society claims not to be associated with any political party, with the aim of "inciting debate" rather than pushing any particular ideology.

With the exception of Mr Pellett, the speakers are not Fabian Society members.

But Fabian Societies in Britain, Australia and Canada have all been socialist or Left-leaning organisations.

Mr Pellett told the audience that in 2007 he tried to convince former finance minister Michael Cullen that New Zealand's monetary policy was flawed but his concerns were shrugged off.

"It is systemic, not cyclical," he says. "Political and economic orthodoxy is the problem. We are shuffling the deck chairs on the Titanic."

If nothing changed, New Zealand would eventually be selling all its assets to service debt, leaving the country as nothing more than a cash cow for foreign interests, he said.

"What happens if we sell the whole damn lot? We become slaves in our own country."

Mr Pellett fired out a barrage of solutions to pump money into the productive sector and shelter New Zealand from international currency speculation, including introducing a capital gains tax, tax breaks for research and development, and taxing foreign bank transactions.

One of the more radical suggestions was introducing compulsory superannuation and then using contribution rates to control inflation.

"The four Australian banks made $3.6 billion [in 2008] and the rest of the [companies listed on the] NZX made $2.9b.

"We are paying for Australian retirement and we can't afford to pay for our own."

The banks were also part of the problem, he said, tightening the purse strings on businesses while ploughing money into property.

A solution to tight-fisted banks would be to strengthen Kiwibank and give it a mandate to lend to the productive economy, he said.

Another of Mr Pellett's suggestions is to change the Reserve Bank Act, putting in economic growth targets and loosening inflation targeting.

And despite the tag of "inciting debate", the seminar speakers seemed to be preaching to an audience of converted, including East Christchurch Labour MP Lianne Dalziel.

For the ideas to spill into the mainstream public debate, there remain some obstacles. A big hurdle is that the changes would devalue most New Zealanders' biggest asset, their houses.

Mr Oram said the changes could be phased in to soften their impact but admitted the housing market would be "soggy" for a long time.

- © Fairfax NZ News