Deutsche Bank: Labour & Alliance Party Policy Releases
Data Flash (New Zealand)
Labour & Alliance Party Policy Releases
Labour Party Policy
As expected the launch of the Labour Party's economic policy did not contain any new initiatives. Instead it merely
re-packaged a number of policies which had been released over the last few months into one document.
Policies that Labour reconfirmed included:
- Labour would undertake a full review of the operation of monetary policy, with the likely result that the RBNZ adopts
a less rigid time frame to react to any overshoot in its inflation target. This will move the RBNZ closer to the model
operated by the RBA. In particular, while the RBNZ's focus would remain on price stability, the Policy Targets Agreement
(PTA) with the government is likely to be "loosened". By this it is suggested that they would "maintain the 0-3%
inflation target but amend the PTA to ensure that the RBNZ pays appropriate attention to the need to minimise adverse
impacts on the real economy, including excessive appreciation of the exchange rate". The potential change in wording
would parallel the alteration that took place in 1996 when the NZ First Party sought a reference to growth in the RBNZ's
objective function. In this case, the PTA wording was changed so that the Bank was instructed to "formulate and
implement monetary policy with the intention of maintaining a stable general level of prices, so that monetary policy
can make its maximum contribution to sustainable economic growth, employment and development opportunities with the NZ
economy." Moreover, the proposed Labour change would merely formalise existing RBNZ thinking towards taking more account
of the impact on the real economy in the achievement of the inflation objective. However, any review of the operation of
monetary policy has the potential to raise some concerns in the market regarding the operational independence of the
RBNZ, particularly if the review is badly handled.
- recombining the roles of Minister of Finance and Treasurer;
- broadening the objective of fiscal policy to include sustainable growth, full employment and social equity;
- introduce a new 39 cent tax rate step on incomes over $60,000;
- stop asset sales;
- the imposition of a five-year freeze on current import tariff levels;
- the creation of a $200m a year industry development program;
- the co-ordination a National Development program; and
- a variety of initiatives to enhance skills in the work force.
Alliance Policy Proposals
At the same time as the Labour policy announcements, the Alliance released their alternative Budget. In this paper they
presented their projections for the fiscal balance based on higher expenditure on healthcare, tertiary education, job
growth and pensions. On the whole, they propose to spend around $6.5bn more than National over the next three years. To
help finance this increased expenditure the Alliance plans to increase tax rates and generate an extra $1.0bn in revenue
from the introduction of a tariff on imports from countries other than Australia. The Alliance's fiscal surpluses for
the 2001, 2002 and 2003 fiscal years were projected at $0.7bn, $1.3bn and $2.0bn respectively.
The key issue for the financial markets is estimating the likely policy implications arising from the potential election
of a Labour-led coalition government. Given the likely share of voter support and that Dr Cullen with be the Treasurer
in such an arrangement, Labour's policy will dominate such a coalition - particularly economic policy. In this regard,
an important point to recently emerge from Cullen's comments is that if it is not possible to implement tax increases
because of insufficient parliamentary numbers - i.e. needs to rely on NZ First Party support - then spending on health
and education will need to "give way" to some extent. Given that a number of polls suggest the strong probability that
the NZ First Party may hold the balance of power, this scenario tends to place a natural cap on any Labour/Alliance
coalition spending plans.
Labour's Alternative Budget
This morning's release of Labour's policy announcements follows on from yesterday's alternative Budget. According to
this Budget, the nation's operating balance grows steadily over the next three years to reach $1.6 billion for the year
ended June 2003. This is $738 million lower than National is predicting over the same period. However, the bottom line
number hides significant differences in composition.
Firstly, it should be noted that the two figures being compared are not like on like. Labour's surplus excludes money
put aside to fund future superannuation. This is not a "genuine" expenditure measure. If this is excluded then the
Labour surplus rises to $2,050 million just $291 million shy of National's pick.
The key difference between National and Labour is that Labour promulgates larger government. Under a Labour government,
expenses will be 2.3% higher (or $915 million). Identified expenses are $1.86 billion greater but this is because Labour
has dipped into the "provision for future initiatives" fund allowed for under National's accounting framework.
This extra spending is two thirds funded by not lowering the middle rate of tax - as National would do - and by raising
the top tax rate.
In our view the key risks to Labour's strategy are:
- expectations of tax earned through a higher impost on top income earners may be overestimated as tax avoidance
measures will be rife;
- a higher core expenditure base leaves the Government more vulnerable to any cyclical downturn; and
- by chewing into the future initiatives fund now it leaves Labour little room to manoeuvre in an emergency.
We are not supportive of Labour's general policy platform, as we do not believe in bigger government. However, we
concede that if Labour's projections are correct then the bottom line numbers provide little cause for concern for
financial markets or the rating agencies.
ENDS
This, along with an extensive range of other publications, is available on our web site http://research.gm.db.com
In order to read our research you will require the Adobe Acrobat Reader which can be obtained from their website
http://www.adobe.com for free.