Editorial: It's time for fiscal debate

OPINION: Labour leader Phil Goff was ridiculed in many quarters when he announced a major economic policy shift late last year: Labour was now ready to reconsider our monetary policy and shift its focus beyond the one narrow target of low inflation. It would look, too, at how monetary policy affects growth and productivity and management of the exchange rate.

In other words, Labour wants unemployment and the strength of the dollar to be taken into account – as well as controlling inflation – when the independent Reserve Bank sets and reviews the benchmark interest rate.

The announcement ended 20 years of bipartisan consensus between National and Labour over policy targets and the primacy of price stability. Labour thinks the country's export performance would be lifted by keeping the exchange rate as stable and competitive as possible, although Mr Goff accepted that price stability and low inflation should remain important objectives for the Reserve Bank.

If all went according to plan, this fundamental shift in policy would result in lower interest rates for businesses and home-owners, and "working New Zealanders with mortgages will benefit from policy that tilts the emphasis away from its current sole concern with the holders of wealth, to a focus on creating wealth".

Prime Minister John Key was dismissive. Other commentators warned against abandoning the orthodox wisdom on monetary policy. But lo and behold – the International Monetary Fund's chief economist, Olivier Blanchard, now says orthodox policies were powerless to prevent the crisis that swept the global economy in the last 18 months or so. In a paper published this month, he suggested higher inflation, help for the poor and greater government involvement might do a better job of protecting countries from financial upheaval.

"As the crisis slowly recedes, it's time for a reassessment of what we know about how to conduct macroeconomic policy," the paper said.

A new way would allow intervention to puncture dangerous asset bubbles, as happened in the housing market. Much more controversially, they would raise the possibility of lifting the target for consumer price inflation to around 4 per cent. Higher average inflation (and thus higher nominal interest rates to start with) would enable interest rates to be cut more substantially, helping to reduce a drop in economic output and deterioration of government's fiscal balances.

Mr Goff, inevitably, seized on the paper to accuse National of having a closed mind on monetary policy. The Government, in contrast, has been remarkably silent.

But the real point is that the paper is intended to trigger a debate on the best way to achieve stability and avert economic shocks. It is no longer the preserve of economic illiterates and cranks to challenge the monetarist orthodoxy embraced by Eestern democracies in recent decades in the guise of Thatcherism in the UK, Reaganomics in the US and Rogernomics in this country.

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