The government's decision to impose another 5 c/L (plus GST) petrol tax in order to fund additional roads has led numerous commentators (such as the Herald) to ask the obvious question: why are they raising taxes when we are sitting on an extremely healthy surplus? But this is the wrong question. While the government gained the power to impose this tax a mere two weeks ago, it was widely tipped to delay introduction until oil prices had dropped. So a more interesting question is "why now"? And I think the answer to this can be found in the announcement earlier in the week from the CTU that they would be pursuing 5% in '05 - a 5% across-the-board wage rise for every worker.
What's the connection between petrol taxes and union agitation for wage rises? The fact that the latter are seen as inflationary, while the former is seen as being likely to stifle the economy to some degree. For over a year now, the Reserve Bank has been making noises about the tightening labour market, and threatening to relieve the pressure by hiking interest rates with the deliberate aim of throwing people out of work (as Don Brash did repeatedly in the 90's in an effort to keep unemployment above 7%). They haven't done so so far because the labour shortage has famously failed to deliver better wages to workers (the law of supply and demand losing out to the power and greed of employers); however, with the prospect of wages finally rising, the Reserve Bank would have effectively been forced to act. Enter the petrol tax. By taking a bit of "puff" out of the economy, this will probably discourage the Bank from taking immediate and severe action, thus allowing workers to get their wage rise.
The local commentariat's tunnel vision with regard to taxes and their shallow analysis of why they are imposed ("government greed") has caused them to miss the real story here: the government is now second-guessing the Reserve Bank and attempting to guide the Bank's decisions on monetary policy. It's a decisive break with the "hands off" approach established in the 80's, and one with far-reaching implications. But it's obviously far less important than spreading the idea of a government lining its pockets for no better reason than greed.
10 comments:
interesting analysis. it would take a hell of a lot more than a 5c/ litre fuel price rise to stem the inflationary effects of a 5% pay rise. The question remains as to why money is better off in a Govt surplus than in the pockets of workers in spite of the deflationary effect of it. By inference you are suggesting that Labour has been holding all the increase in wages over the last 5 years to avoid inflation.
Posted by sagenz : 3/03/2005 02:18:00 AM
On the other hand, the 5c petrol price rise, since it wil have an effect on the overal inflation rate due to the pervasive nature of the product being used in both production and consumption sectors, will give the Reserve Bank another excuse to push up interest rates - despite the not realised 5% pay rise demand. Interest rate rises for domestic political purposes, such as dampening consumer demand, are a stealth tax.
Posted by Hans Versluys : 3/03/2005 11:18:00 AM
Hans: I can't see how you can describe interest rates as a tax. As interest rates go up net lenders get more money and net borrowers get less (very roughly). (Our government is a net borrower).
The Reserve Bank basically operates on an inflation target. If you set the inflation target to 10%, then interest rates would fall substantially (I doubt this would be long term as it would be very difficult to hold such a target - inflation would tend to spiral upward and we would run the risk of stagflation).
Essentially the government drives the economy with fiscal measures (at least in the short term). There isn't any choice about this - I'm quite sure that Brash expects interest rates (and unemployment) to shoot up as a result of his planned reduction in the surplus.
Posted by Rich : 3/03/2005 11:52:00 AM
If anyone seriously thinks a 5% petrol tax will have any effect on the economy they must have their head in the sand.
The price of oil has risen almost 300% since 1999. Sweet crude futures today are running over $53bbl. What has happened during this time, between 1999 and 2005 - we've seen global growth almost of unprecedented proportions. Raising the cost of petrol due to the demand inelasticity in fuel will only really have an inflationary effect on the economy.
If the economy was going to be stifled by higher fuel costs we'd be seeing this effect now. The cost of oil is 45% higher than this time last year.
Petrol tax - good job I say. The market needs a signal pronto to develop alternatives to our drive in utopia, suburban McMansion lifestyles - perhaps the largest misallocation of resources since the end of the second world war - We are living in a most abnormal period of economic history.
Posted by Steve : 3/03/2005 01:35:00 PM
Hi Rich, I didn't say interest rates were a government tax, but they reduce demand in the economy (be it for productive or consumer lending) and in that sense have a similar effect as a tax increase would. I guess it is currently politically nigh impossible to raise taxes, as they should be raised in a boom period, following Keynes here, so interest rates go up instead. Interest rate rises also cause demand for the NZ$ to rise and makes our exports dearer. Due to our appetite for (cheap) imported goods our trade and current account balances will remain weak, which can only be solved by forcing people (or encouraging them with higher interest rates) to save more, reducing demand and employment as a result.
On a different track, tying up all our wealth (and debt) in the housing sector looks ludicrous, causing house price inflation that isn't adequately reflected in the inflation/interest rate policy (the Reserve Bank uses consumer prices as a guide, largely excluding house price inflation). In Germany and other continental European countries, capital is reserved on the market for housing: you are required to save specifically for your house before you can get a mortgage (at a far more affordable rate than the market rate for capital). Hence house price inflation in Germany has been nil over quite a long time (see The Economist) and they don't have a frightening current account deficit like ours (not that the German economy performed well in general, but that is linked more to general economic policy rather than just monetary policy).
Posted by Hans Versluys : 3/03/2005 03:34:00 PM
Hans - that sounds about right to me.
At least Labour isn't cutting taxes and blowing the surplus in a boom as the right seem to want.
Do you think if the Nats get in they'll make (noted National member) Rongo Wetere finance minister?
Posted by Rich : 3/04/2005 01:49:00 PM
My hunch is that Winston Peters will sooner be finance minister than Rongo Wetere.
Dr Cullen is running a classic Keynesian policy (run surpluses in a boom and deficits in a recession) but he has very little lever over monetary policy now that the new orthodoxy is to heave over that aspect of economic policy on a non-elected Reserve Bank (albeit with a remit on inflation targeting). I have no idea what National's economic policy is, other than cutting taxes no matter what (in a strange echo of that current American fiscal policy is).
Posted by Hans Versluys : 3/04/2005 04:36:00 PM
a 5c rise in pertrol tax is a regressive tax ie por peopel pay more rich pay less as a fraction. So the right should be hapy and hte left unhappy because in the end any money the government takes has to come back again somehow whether it is spent or returned with tax cuts.
Posted by Genius : 3/04/2005 11:31:00 PM
Genius: there's no question money taken in in taxes now will come back. The question is when. And really, I don't see any problem at all with saving now to spend during the inevitable recession, or for people's eventual retirement.
Posted by Idiot/Savant : 3/05/2005 11:04:00 AM
Sage: not quite. But there's no question that running surpluses - taking money out of the economy to use later - reduces demand, and has thus acted as both a brake on the economy and on inflation (and hence interest rates). And its now left the government in a bit of a bind: it wants to spend some of that cash, and there's pressing need in all sorts of areas (I'd point at health first), but if it spends too much it will simply raise inflation. The irony that it is Labour that is concerned about this - while Don Brash promises inflationary tax-cuts which will simply cause interest rates to skyrocket - is inescapable.
Posted by Idiot/Savant : 3/05/2005 11:16:00 AM
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